Academic journal article Entrepreneurship: Theory and Practice

New Financial Alternatives in Seeding Entrepreneurship: Microfinance, Crowdfunding, and Peer-to-Peer Innovations

Academic journal article Entrepreneurship: Theory and Practice

New Financial Alternatives in Seeding Entrepreneurship: Microfinance, Crowdfunding, and Peer-to-Peer Innovations

Article excerpt

New financing alternatives, such as microfinance, crowdfunding, and peer-to-peer lending, have expanded rapidly. To date, few studies have investigated the antecedents and consequences of these financing mechanisms. This special issue provides an academic foundation for understanding new financial options that entrepreneurs can now use to start and grow ventures. In the introductory article, we integrate strands of the literature on emerging innovations in entrepreneurial finance and provide a framework for a systematic approach to new research questions. We conclude with a discussion of the six papers in the special issue and demonstrate how they contribute to the framework.

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Entrepreneurial finance is rapidly evolving. Whether in mature or developing economies, entrepreneurs are combining traditional debt and equity start-up finance (e.g., friends, family, angel investors, venture capitalists, and occasionally banks) with microfinance (Khavul, 2010), crowdfunding (Schwienbacher, Belleflamme, & Lambert, 2013), peer-to-peer lending, and other financial innovations (Moenninghoff & Wieandt, 2012). Such new approaches to entrepreneurial finance share a number of common features. First, these innovations may have arisen in one part of the world, but they quickly diffused across the globe. For example, microfinance emerged as a solution to a lack of capital for those living in poverty in developing economies, yet it has spread to developed economies where entrepreneurs also find micro loans difficult to secure (Freedman, 2000). Second, new financial alternatives use platform-mediated approaches to aggregate many, often small, individual transactions. For example, crowdfunding emerged as a way of leveling the playing field and allowing individual investors an opportunity to pool relatively small amounts of money together in order to meet the funding requirements of new or expanding ventures. As a financial innovation, crowdfunding has diffused from an initial launch in several developed economies and is rapidly spreading across developing economies (World Bank, 2013). Finally, various peer-to-peer networks, both debt and equity, use social networks to harness communities of both entrepreneurs and investors in an effort to improve the efficiency and effectiveness of aggregating and transferring funds. Thus, innovators are designing new financial instruments to provide entrepreneurs with financial services that are otherwise difficult to access (Breedon, 2012).

Alternative forms of entrepreneurial finance are proliferating, yet our understanding of them remains in its infancy. In this special issue, we examine how the expanding choices in financing new ventures are changing the nature of entrepreneurship. Our introductory article builds on existing theoretical foundations to develop a broad framework for thinking about emerging alternatives in entrepreneurial finance. At its core, our framework rests on the proposition that innovations in entrepreneurial finance emerged both as a result of imbalances between the supply and demand for capital and as a consequence of improvements in technology. With each new financial innovation there come ownership, governance, and outcome considerations that are embedded in the institutional context from which they emerge and in which they operate. To push the framework forward, we discuss an agenda for future research and show how the six articles in the special issue fit into the conceptual structure we offer.

A Framework for New Financial Alternatives in Seeding Entrepreneurship

Recent changes in technology and regulation have worked in tandem to make borders more permeable and to lower barriers for diffusion and adoption of innovations. Such changes in technology and regulation have spurred the development of the new financial alternatives for seeding entrepreneurship and have increased the flow of entrepreneurial capital (Financial Conduct Authority, 2014). …

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