I have a business idea. A fintech platform for crowdsourcing investment in private business. Similar to P2P but pay a fixed portion of profit instead of fixed-income. Investor can get in or get out of the business anytime or with some agreement. It’s like a closed-universe stock system. This is using app.
More research is needed though. I should study about the dynamics of P2P lending. What happen to the average creditor if a debtor defaults? Will the involved lenders lose all of their money, or the loss of principal eats away on the company’s margin (the latter is more probable than the former, of course).
Then, how to structure the incentive of the business owners? Drawing my experience in a certain microfinance company, corn farmers under profit-scheme are more likely to under-report their corn yield, pocketing the difference for themselves and avoided ceding too much corn (or harvest money) to the company. That’s still not taking into account the harvest failures. For farmers under loan-scheme, there are only the risk of non-performing loans (mostly caused by harvest failures). Thus profit-sharing scheme presents an incentive problem. If the business owner failed to pay debt, their credit rating would sour. However if the business owner under profit-sharing scheme would be encouraged to cheat their investors (or at least nothing would stop them from doing so aside from their own integrity, which is something we should not rely too much if we are trying to build scalable system here), given that there are not enough scrutiny from the investors, unlike the publicly traded stocks.
The investors are also long term owners, unlike debt where the relationship ceased when the debt is repaid (or defaulted). Investors wishing to relinquish their ownership can only sell to the business owner (who may or may not able or willing to buy back the ownership stake). Even if the shares can be traded between investors in the closed-universe of the app, it would suffer from liquidity problem; not enough volume of trading to make it convenient enough.
Let’s not also forget that this private investing platform is also competing for capital with the stock exchange, which may offer superior return from more established companies.
Debt schemes would offer the convenience of low maintenance for the creditors. Put your money in the app. Get paid a certain interest rate. If the debtor default, it’s obligatory for the company to use their capital reserve to guarantee your money back. Simple, hassle free. Lend and forget. Profit-sharing schemes is too complicated to be executed at retail level. It is not hassle free. It would need all of the investors to be sophisticated investors and all of the business owners also as sophisticated. This is not scalable, as most people have poor skills in managing complex ventures that we call a business.
One solution is to syndication of funds. The average investors just entrust their money to money managers, which then would invest on their behalf. In this way, we just need the people at the contact points to be sophisticated; we don’t need everybody to be sophisticated and responsible for their own decisions. Wait, this is precisely the investment vehicle such as mutual fund, private equity, and venture capital. Damn, I am reinventing the wheel.