Recently interviewed by Crowdfund Insider, Raghavendra Rau the Sir Evelyn de Rothschild Professor of Finance at Cambridge Judge Business School and a founder and Director at the Cambridge Centre for Alternative Finance (CCAF) pointed out that:
In the UK the debt crowdfunding market is far larger than the equity side. This makes sense and mirrors the public markets. Yet access to capital at a very early stage may require equity capital. But globally, over 90% of the crowdfunding market is debt, not equity. It is a debt financed world, at least for SMEs, said Rau.
In defining the main difference between the two, Rau explained:
Most small enterprises do not require equity. They require debt. Debt means you have to have approximately stable cash flows. Equity means you have to convince the investors that you have an amazing idea.
In other words, Rau told Crowdfund Insider that:
Equity crowdfunding is much more about new ideas … equity crowdfunding is a good idea. I do see evidence that investors are not stupid to invest in these types of firms.
This explains why from a societal perspective, equity crowdfunding is more conducive to innovation:
If you want an innovation driven economy early stage companies need access to funds.
It follows that:
The types of companies involved in equity crowdfunding should not be the same type of firms that seek bank financing. I would expect them to be young, very early stage. Looking more like a VC type offering. A bank will never fund a VC type of idea. Perhaps only angels or VCs will finance these firms.
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