For a long time, the funding of start-ups is done through traditional funding sources such as small business loans, venture capital, angels, and loans of family and friends. Nevertheless, the technological developments of the last decade have led to the rise of digital funding sources – those that are executed completely digital. This started with crowdfunding approximately ten years ago, but currently, developments in blockchain technology has given rise to several alternatives such as an ICO, STO & IEO. But what is the stance of people with finance & investment knowledge towards these emerging funding sources? Do they make use of them? Does their preference match the characteristics of these funding sources? What is the focus of education? And how do they see the future of these funding sources?
In order to find an answer to these questions, two surveys were conducted with people with finance & investment knowledge – one with professionals and one with students. Furthermore, it involved 40 persons, of which 52.5% male and 47.5% female. 75% of the respondents are Dutch, and 25% involve a wide variance of nationalities. The respondents were mainly from the finance field of education (70%), but also the field of business (12.5%), economics (5%), and other (12.5%). Moreover, most respondents were younger than 25 (47.5%), followed by the age group of 25-40 (27.5%), 40-60 (20%), and 60+ (5%). Lastly, 55% of the respondents were students, and 45% were professionals.
The Professionals' Stance Towards Digital Funding Sources
From the professionals, 61.1% of the respondents are partly aware of the emerging digital funding possibilities, 22.2% are fully aware of these possibilities, and 16.7% are not aware of these possibilities. The source of this knowledge is mainly derived from readings – 73.3%. This means that professionals primarily obtain knowledge about innovations as these through self-exploring. They do this because they see the potential of this – which catches their interest. On average, these professionals had the choice of deciding between traditional or digital sources in 21.1% of the investment decisions and 23.9% of the funding decisions. This can be explained by the early-stage wherein the digital funding sources still are. Besides that, the lack of specific regulations also causes reluctancy to consider digital funding sources as an option. Because, when the choice can be made, digital sources are chosen quite often. In these situations, it is found that in investment decisions, 48.0% of the time, traditional sources are selected, 39.9% digital sources, and 12.2% a mix of sources.
For funding decisions, it is found that 58.2% of the time is chosen for traditional sources, 26.1% for digital sources, and 15.7% for a mix of sources. This demonstrates that the step for investing through digital sources is smaller than raising funds through digital sources – which is caused by the ability to invest small amounts of funds. Where on the fundraising side still large amounts of funding are sought in once.
Combined, this results in an investment usage of 89.0% through traditional sources, 8.4% through digital sources, and 2.6% through a combination of sources. In funding usage, this concerns 90.0% through traditional sources, 6.3% through digital sources, and 3.8% through a mix of sources.
Therefore, it can be concluded that currently, traditional sources are still the primarily used source for both investments and financing – which can be an indication of digital sources being in a premature phase. The reason for this is that these methods are still relatively new – professionals first need to become fully aware before they will adopt it entirely. Also, the uncertainty among regulations causes the reluctancy of the usage of an innovative way.
Nevertheless, it has become clear that professionals consider the advantages of digital funding sources to be more important aspects of finance and investments than its aspects of disadvantages. This can be seen in figures 5 and 6 – in which the level of importance is shown based on a 1 to 5 scale from not important to critical importance. The professionals consider the ease of investing funds to be the most important aspect (3.56), followed by high liquidity (3.50), low cost of investing funds (3.11), high ability to diversify investments (3.00), high exit rate (2.94), high-interest returns (2.67), gaining influence in the company (2.50), and low risk (2.11). This clearly demonstrates a preference towards investing through digital sources, because in general, those make it easier to invest funds with increased liquidity, lower costs, and a higher ability to diversify – which are the top 4 of most important aspects. Whereas traditional sources may have a lower risk, give either influence in the company or involves interest returns and may include high exit rates – which are considered to be the four least important aspects.
Moreover, the professionals consider retaining a large share of the company by far to be the most important aspect (4.28), followed by low investor intervention (3.67), low information requirement (3.22), certainty among regulations (3.22), the ease of raising funds (3.11), low cost of raising funds (2.83), low-interest expense (2.61), and investors’ advice and guidance (2.11).
This demonstrates a preference for raising funds through crowdfunding on a debt basis, an IEO, or a loan. Because these sources make it possible to raise funds while retaining all shares and without investor intervention, more specifically, an IEO would fit these preferences the best since although it has the lowest certainty among regulations, it has the lowest information requirements and highest ease to raise funds – which are the following three aspects that are considered as most important. Due to this, professionals have high expectations for the potential of these sources. 22.2% thinks that digital funding sources will completely replace the traditional in the future, whereas 61.1% believe that that will partly happen, and 16.7% is not sure. The main reason for this is that the increased cost efficiency will evolve the way how it is done – as it has done in the past.
Furthermore, regulations are currently uncertain among digital funding sources. However, 61.1% of the professionals expect that there will come more specified regulations among digital funding sources – which will increase the certainty. It is also expected to create more certainty through lower deviation among regulations of different countries – thought by 27.8% of the professionals. Besides, that does 33.3% believe that the regulations will become stricter.
Therefore, it can be concluded that the professionals expect the digital funding sources to, at least, partly replace the traditional source and that there will come more certainty among regulations – although this might be stricter. Lastly, most professionals (72.2%) are not sure which digital funding source they consider the best. However, some find the IEO (11.1%), STO (11.1%), or crowdfunding (5.6%) the best source.
The Students' Stance Towards Digital Funding Sources
From the students, 59.1% of the respondents are partly aware of the emerging digital funding possibilities, 9.1% are fully aware of these possibilities, and 31.8% are not aware of these possibilities. Therefore, it can be seen that the awareness of students is slightly lower than that of professionals. This can be explained by the focus of education. Significantly more students are aware of traditional funding sources. Namely, 59.1% of the respondents are aware of this, whereas 36.4% is partly aware of this, and only 4.5% is not aware of this.
The source of the knowledge of traditional funding sources derives mainly from education – 90.5%. On the other hand, the source of knowledge of digital funding sources derives mainly from media – 60.0%. This demonstrates that higher awareness is mainly caused by education because most students do become aware of traditional funding sources through education (86.4%) while only a significantly smaller proportion for digital funding sources (27.3%).
Therefore, it can be concluded that the focus of education is mainly on traditional methods rather than innovative ways. However, it is unclear if this is caused by the openness of universities to teach about these innovations since 38.1% of the students are not sure what the degree of openness is. Besides, that does 19% think that the degree of openness is low, 23.8% believe that it is at a medium level, and 19% feel that it is at a high level. Nevertheless, this high percentage of students that is not sure might actually indicate a low degree of openness – as being open stands out more than being reserved.
Moreover, 73.3% would prefer to invest funds through traditional sources compared to only 26.7% that prefer to invest funds through digital sources. 60% would prefer to raise funds through traditional sources compared to 26.7% that prefer to raise funds through digital sources, and 13.3% that find the source type irrelevant. This demonstrates that students would rather make use of traditional funding sources. The reason for this is likely to be that the students tend to prefer methods that are being taught.
Nonetheless, almost all student think that these digital sources will partly replace the traditional sources in the future compared to only 13.3% that believe that it will not replace it at all. The main reason why they think this is because things are becoming more digital, which is expected to continue in the future. This mindset of the students indicates that digital funding sources have high potential because digitalization is expected to continue growing. Altogether it can be concluded that education creates a reluctant stance of students towards digital funding source, although they do believe it will be the future of fundraising.
The preferences of professionals in both investing and fundraising, clearly demonstrate that aspects of advantages in digital sources are considered to be most important – such as the ease and low cost of investing and high liquidity on the investment side. As well as retaining a large share of the company and low investor intervention on the funding side. Whereas aspects of traditional sources – such as low risk, influence in the company, investors’ advice and guidance – are considered to be less important, except certainty in regulations. Altogether, this demonstrates a preference for digital sources.
Furthermore, from the students’ awareness, it can be seen that they are significantly more aware of traditional sources than digital sources which is caused by the focus of education. In which awareness of traditional funding sources is obtained by 86%, whereas this is only the case for 27% for digital funding sources.
However, students as well as professionals do still have high expectations of these digital funding sources. In both groups, almost everyone believes that the digital funding sources will, at least partly, replace the traditional funding sources.
Altogether, it demonstrates that digital funding sources are still in a premature phase but that they have a high potential.