RIETI Policy Seminar

# Entrepreneurship, Innovation, and Finance: New growth avenues in developed economies (Summary)

## Information

• Time and Date: 13:00-17:30, Thursday, September 26, 2019 (Registration starts at 12:30)
• Venue: 1-3-1 Kasumigaseki, Chiyoda-ku, Tokyo, RIETI's seminar room #1121 (METI Annex 11th floor)

The long-established structure of corporate financing is changing at an unprecedented rate, and the world is changing as a result. Will Japan be able to successfully adapt to these changes? This topic will be presented and discussed in this seminar, co-hosted and sponsored by the Japan Society for the Promotion of Science's (JSPS) KAKENHI grant "Research on Startup Finance to Support Regional Revitalization." This seminar follows on the work and results of RIETI's research program titled "Creation and Development of High-tech Startups," conducted from 2017-2019. Professors from top business schools in the U.S. and France have been invited to share their knowledge and expertise on this important subject. Together with fellow prominent researchers in the field from Japan, they will provide insights on new avenues of growth for entrepreneurship, innovation and finances, in addition to their interactions towards the future growth of firms and industries, which could provide clues to help guide Japan in the rapidly changing financial environment of the present and near future.

## Summary

### Opening Remarks

NAKAJIMA Atsushi (Chairman, RIETI)

If Japan is to maintain its presence as an innovative country, it needs to position and foster high-tech start-ups as a driving force. Establishing a so-called entrepreneur ecosystem will also be critically important. In recent years, new financing technologies have been developed in finance such as fintech and blockchain. As we move forward, we have to keep in mind these new financing methods and financial technologies.

Today, we invited professors from top business schools in the U.S. and France to this seminar to talk about crowdfunding, blockchain, and other innovative financial technologies for high-tech start-ups. Japanese researchers at the forefront of this field will also join them to discuss the forms that entrepreneurship, innovation, and finance should take to drive new growth. Furthermore, they will exchange opinions on what measures will be needed to establish an entrepreneur ecosystem in Japan. I believe that this is a great opportunity for us to share useful knowledge and insights on financial technologies for high-tech start-ups.

### Keynote Speech: Small Business Finance

Gregory F. UDELL (Professor of Finance, Kelley School of Business, Indiana University, U.S.)

There is a growing academic interest in small and medium enterprise (SME) finance. We have made substantial progress in our understanding of how SMEs access finance, but is the research tethered to the real world? About 70% of the labor force in Japan is employed by SMEs, so access to finance by SMEs is a big issue. There is plenty of evidence to indicate that SMEs do not get all the funding they need to finance the projects and activities they have, so we must try to better understand how SME financing occurs and how we can possibly improve it going forward.

##### Progression of research on SME finance

The progression of research on SME finance can be divided into four phases. The first phase started in the 1980s with a new theory about financial intermediation. It was based on information, particularly the ability of banks to solve an asymmetric information problem. The second phase started in the late 1980s and 1990s with an emphasis on contract terms in lending. There also started to be literature on collateral, covenants, and commitments. The third phase shifted to an emphasis on soft information and its importance in lending. Soft information is information that cannot be easily quantified and therefore cannot be easily communicated. The fourth and most recent phase is one where research on SME access to finance has become more nuanced and complex. There has been a lot of work on institutions and how they matter.

##### Lending technologies and SME lending channels

SME finance and its impact can be looked at in two different ways: lending technologies and SME lending channels.

A lending technology is a way of underwriting loans. It is a combination of screening mechanisms, contract structures, and monitoring strategies. They are either relationship-based or transactions-based, and help align research with the real world. We can define ten distinct technologies or ways in which banks lend money to SMEs. One is relationship lending which is expensive because of the time it takes for a loan officer to do an evaluation. The other nine which are transactions-based lending are less expensive, but do not apply to all firms. An example is financial statement lending which is when financial statements are reliable enough that a loan officer can make a loan based primarily on the information in those financial statements. The other types include asset-based lending, factoring, equipment lending, leasing, real estate-based lending, small business credit scoring, crowd funding, and trade credit.

An SME lending channel is a specific lending technology paired to a type of financial institution. These institutions, for example, small and large banks, small and large finance companies, credit unions, and corporations. Not all institutions offer the same lending technologies. Lending channels are useful for analyzing key aspects of SME finance, such as understanding what happens in a financial crisis. For example, looking at the recent financial crisis in the U.S., we could see both small and large banks contracting all of the channels they provide and therefore supplying less lending to SMEs.

##### Unsettled issues in SME finance

When it comes to SME finance, there are still many areas for which we do not know enough in terms of the academic literature. We can think of this as defining the frontier of our knowledge.

For example, there are opposing points of view as to whether competition is good or bad for SME finance. The traditional market power view is that lower competition leads to higher prices and less access to credit, while the relationship lending view has exactly the opposite conclusion. The evidence is currently mixed so we need more research on competition and its effect on SME lending.

There is an issue about hardening soft information. Much research indicates that it is problematic for large banks to communicate soft information internally. In large banks, discretion is often quantified in risk ratings. One issue is whether or not this can harden information.

In the academic literature, there is an enormous confusion about collateral. In SME lending, there are two different ways in which collateral is pledged. One is where entrepreneurs pledge their personal assets as collateral, which we call outside collateral. The other is when a business pledges its assets as collateral, which we call inside collateral. While we have a lot of theoretical models in academia about outside collateral, we have very few models of inside collateral. Furthermore, most empirical work cannot distinguish between the two types, so I think academics have a long way to go in understanding the difference between the two types of collateral and the role of inside collateral.

There are challenges in identifying lending technologies in existing data. During a financial crisis, for example, we cannot tell which loans are asset-based and which are not, so it would be helpful if we could test SME lending channel paradigms in a more rigorous way.

Audited financial statements are important in financial statement lending, but we still do not know enough about their value and which SMEs should get them. There is just not enough information about the trade-off between their benefit and cost. The literature is split on this. Moreover, what we learn about audits in some countries may not apply to others, so there is still a lot we do not know.

When we are trying to identify whether a credit crunch significantly affected access to credit by SMEs, we have to make sure that we are identifying a supply effect and not a demand effect. This is a tricky issue and there is not a complete agreement about what technologies and situations work best.

In addition, other issues to settle in SME lending include the effect of macro-prudential policy tools, the efficacy of government guarantees, the role of cooperatives, the role of trade credit, the role of loan securitization, and the potential role of fintech.

In conclusion, we have learned a lot in academia about SME lending, but we do not know as much as we should and there is still a lot more to learn. We need more convergence between the academic world and the real world, and the academic literature needs to look deeper into many issues which remain unsettled.

### Comments on the Keynote Speech

UESUGI Iichiro (Professor, Institute of Economic Research, Hitotsubashi University)

I would like to comment by speaking about five issues pertaining to Professor UDELL's presentation. I will talk about the background, the previous research, and the future agenda for each of these issues in the Japanese context.

The first issue is about competition in loan markets. In the last 20-30 years, the number of financial institutions has gone down drastically, and in the last 10 years, interest rates have similarly gone down. There is a dispute in the government on whether financial institutions should be allowed to merge or not. In order to make the discussion fruitful, we need to measure the extent of market concentration in a more detailed and accurate way so that the measure can be more closely linked to the lending situation. We should come up with another method of measurement.

The second issue is about the efficacy of government guarantees. I think the issue is not limited to credit guarantees. There exist other types of interventions in the loan market such as government bank loans and capital injections to banks. We have to undertake a comparative analysis to study the efficacy of these different government commitments.

The third issue is about the potential role of fintech. This technology has a potential to be quite disruptive, however its impact is still limited. Fintech may change the way firms use some lending technologies or change the structure of the market. It is also important to keep in mind that the government's approach to fintech can influence its success.

The fourth issue is about the impact of population aging. The average age of CEOs of Japanese SMEs has been increasing and the majority are retiring soon. However, they are having a difficult time finding successors; CEOs in Japan are often asked to provide personal guarantees to receive bank loans for working capital although many people now are reluctant to do so. The government needs to develop a scheme to improve this situation.

The fifth issue is about the efficiency of credit allocation and the existence of zombie firms. Zombie firms are nonviable firms that survive only through bank loans. We need to understand the current situation, particularly after the global financial crisis. In addition to zombie firms, we need to study the phenomenon of zero-leverage firms, as well as why we have them co-exist.

#### Q&A

Q1: How will equity financing and debt financing be utilized by SMEs?

UDELL:
The equity channel in the U.S. has just opened up, so we do not have enough data to know, but it is an active market so we are going to find out. I do not know enough about Japan to give an answer.

Q2: For SME lending, which direction do you think will be stronger, cheap technology-based credit scoring or soft information?

UDELL:
We know one is certainly cheaper, but we do not know. My guess is that when you get larger and larger, the predictive power of credit scoring gets weaker and weaker.

Q3: You have mentioned a little bit about SME lending and cooperatives. Do you think the differences in objective function and corporate culture between banking institutions could be a third "prism" for future banking studies?

UDELL:
Do we know enough about cooperatives? Somewhere between 70-80% of deposits in the U.S. are in credit unions. In the U.S., I can anecdotally give you examples of really good behavior. In Spain, there was bad behavior when they were spatially deregulated and went across the border. I think this is a great research area and one that has great policy relevance, but I do not have any answers.

UESUGI:
In terms of objective function, OGURA Yoshiaki recently conducted some research which is in the Journal of Banking and Finance. He compared government banks with regular financial institutions on whether they were trying to increase overall volume.

### Special Session: Crowdfunding

#### Presentation 1: (Equity) Crowdfunding: Anything to celebrate?

Armin SCHWIENBACHER (Professor, SKEMA Business School, France)

There are many different forms of crowdfunding and each is fundamentally different. Among those is securities-based crowdfunding, also known as equity crowdfunding (ECF). This is where a company sells shares or some other kind of securities to a crowd, and the crowd participates in development.

The way crowdfunding works is that platforms are structured in a way that they interact as little as possible with any financial regulations. This keeps transaction costs low. On the other hand, this means the crowd is less protected. Equity crowdfunding is the most regulated form of crowdfunding.

The market size of crowdfunding was $3billion in 2012,$16billion in 2014, and it is projected to be $95billion in 2025. It is difficult to predict, but we expect high growth rates in the coming years. Within that market, ECF is a small piece. It is about 3% of total volume. Governments in different countries have helped a lot to promote ECF, because they think it will increase the amount of equity financing available to SMEs. Many regulatory changes have been implemented to promote ECF and protect the crowd. There are three main dimensions along which regulations were developed. First, platforms gatekeepers were created to give the platforms some responsibility to ensure correctness and completeness of securities. Second, limits were placed on individual investor contributions. Third, disclosure requirements were increased. ##### Challenges with equity crowdfunding ECF remains a very small, niche market. The important thing is that it is filling a gap that banks and other financial intermediaries do not fill. If you look at the new industries we have today that started even as far back as 30 years ago, most of the big players received venture capital at a time when nobody else wanted to finance. So while the market is small, the economic impact is potentially large. The same argument applies to crowdfunding. This means we need to wait to see the true economic impact of equity crowdfunding. Another big challenge is that we do not know if the crowd receives appropriate returns. We do not know what the return is going to be and if investors will be ready to re-invest their money afterwards. This will very much depend on the returns they get with initial projects. We also face the challenge of secondary markets. It is easy to invest, but we do not know how to return the money to the crowd. With ECF, companies are unlikely to go public, so the potential of returning the money is low. ##### Equity crowdfunding and the future There is a big debate in the U.S. about the "testing the waters" policy. It is about whether entrepreneurs can contact investors and gauge their appetite, before actually formalizing the investment. In the U.S., this is currently not permitted for ECF involving non-accredited crowd investors. Can we rely on a non-binding commitment with investors? Using data from the French platform WiSEED, we can check whether people are actually honoring their commitments since this platform uses water-the-water with members. We saw massive retractions with only about 18% of money promised actually being converted. We also found that women are more reliable than men, so perhaps we should have more women making investment decisions. Also, while commitments are hard to predict at the individual level, the overall amount of commitments made by the crowd is a good predictor of funding success, so the testing-the-water policy should be promoted. With ECF, the crowd is generally not good at understanding the quality of projects. They are very technical and highly-innovative. Some places are starting to change the form of financing. The French platform WE DO GOOD is doing royalty payments. These are things I think the crowd can more easily evaluate. So having alternative ways of financing may be a way to decrease risk. In conclusion, ECF has matured, but there are still many challenges and it is unclear how big it is going to become. Through experimentation done in Europe, we have a better understanding of what works and what does not work. We should consider ways to improve crowd participation in addition to simple investment, including voting rights. As for ECF's contribution to SME financing, innovation, and society, we still need to do more research. I am convinced that there is some positive contribution, in particular because ECF is typically not competing with banks. It is extra funding. Research-wise, I think crowdfunding as a field to study is starting to get more crowded, but there is still a lot of space to do things. We already know how crowdfunding works, but there is still a lot of theory testing we can do. Everything is done through the internet, so there is a lot of information one can get and test that was not possible before. All the information that the platforms collect will help us better understand how decisions are made in SME financing. However, what I think the research community needs to figure out first are the ethical questions that underlie the use of some of these data, how they should be collected given their private nature, and to what extent we can use them for research. #### Presentation 2: The Impact of Blockchain on Entrepreneurship, Innovation, and Finance Fabio BERTONI (Professor, EM Lyon Business School, France) Blockchain is a distributed ledger that lists timestamped transactions that are organized in cryptographically-linked blocks. One key characteristic of blockchain is that it is immutable or resistant to tampering. Another key characteristic of blockchain is that it is distributed. It means everybody has access to the information and it is validated through a collective agreement. This characteristic has profound implications on privacy, security, ownership, transparency, and censorship. Blockchain is being used in a growing number of applications and we are now in a so-called phase of exploration. ##### The governance of blockchain The governance of blockchain is very important and is often a topic of research. The standard way distribution of consensus is done is through proof-of-work (PoW). With PoW, everyone participates in a mining competition by solving a puzzle. When a solution is found, everybody starts to work on the next puzzle. That is essentially how it works. The interesting part is that by solving the puzzle, you are essentially validating the latest block. This is what really links the blocks together. Recent literature looked at PoW and found that forks sometimes occur and a blockchain splits into two. Subsequently, users have a disagreement on which of two is the "true" blockchain. So while the past is immutable, there is not necessarily only one future or path. You can have forks which lead to multiple versions of blockchains. This has happened in many blockchain platforms, such as Bitcoin and Ethereum, and is an inherent part of the system. Forks are bad for a blockchain, but some people argue that forks could be desirable because they create competition between blockchains. Another problem with blockchain is what is called "the last mile problem." What this means is that while blockchain is very good at recording information, it does not make it trustworthy. The internet of things (IoT) could help here. Blockchain is good at recording things and IoT is good at measuring things, so the combination of the two is actually what many start-ups are now looking into. ##### Economic impact of blockchain Some researchers argue that blockchain has the features of a general-purpose technology. Typically, we tend to underestimate the impact and overestimate the speed of adoption of general-purpose technologies. If this is applied to blockchain, it could possibly take much longer to have an impact on the economy than we think, but that impact could also be much bigger than we think. Blockchain could have an impact on different dimensions of corporate governance. It could improve shareholder voting, increase ownership transparency, improve liquidity, and prevent backdating of executive stock options. Conversely, the increase in transparency could backfire and prevent some activist investor strategies. Blockchain could also have a significant effect on competition and market structure. One paper showed it could reduce barriers to entry into new markets, but that it could also make collusion among incumbents more problematic. Another paper showed that blockchain could cause market segmentation between the blockchain market and the cash market, so the effect would not necessarily be positive. An initial coin offering (ICO) is an offering in which a company sells a native token. It is generally accepted that in recent years, blockchain start-ups received more money though ICOs than through venture capital. Right now, there are about 5,000 different tokens and about 300 different exchanges where you can buy and sell these tokens. These token exchanges are loosely regulated and vary enormously in how they work, which tokens they exchange, and which users they allow to exchange. This also results in a lot of market segmentation. ##### Regulation of blockchain and the future The regulation of blockchain is extremely fragmented and regulators are having a hard time catching up with the technology. In the U.S., tokens are considered securities and regulated as such. In Japan, tokens have a special status, whereas in China, exchanging money for tokens is prohibited. Studies show that there is a huge amount of market manipulation with token exchanges. While "pump and dump" schemes are illegal in equity, they are not illegal in blockchain when tokens are not considered securities. One paper measured the activity of Bitcoin and how much of it is actually related to illegal activities. Their estimate is that as much as 50% of all bitcoins transacted, or about$76billion, was transacted for illegal activities. In addition, it is easily transferrable across borders, not easily tracked, transparent, and reliable. So in terms of security, there are still many concerns.

What is the future like for blockchain? Well, blockchain is likely to change dramatically in the next few years. People are working on alternatives to PoW which could scale better and not fork as much. The big boom blockchain had in 2017 is cooling down and big players like IBM and Facebook are stepping in. Furthermore, regulation is underway in many countries and synergies with IoT are being explored. My impression is that the best is yet to come and we will probably see a lot of changes in the next few years.

#### Presentation 3: Does Equity Crowdfunding Have Potential for SMEs and Ventures?

Equity crowdfunding (ECF) is my topic and I am not very optimistic about it. There are various difficult issues and we need solutions for them. ECF in Japan is only three years old and still in an early stage, so I would like to identify and talk about its potential, especially for SMEs and venture capital firms.

##### Overview of equity crowdfunding in Japan

There are various different types of crowdfunding like donation-based crowdfunding and purchase-based crowdfunding. Now, I would like to talk about investment-based crowdfunding and its status in Japan.

In Japan, there are two different types of investment-based crowdfunding, fund-based investment and equity-based investment. I will focus on this second type which we call ECF. There are three sites for this type of crowdfunding in Japan: FUNDINNO, GoAngel, and Emerada. Unfortunately, Emerada will soon be withdrawing from the market (September 2019).

What is the current situation of ECF in Japan? The first point is that we do not know if it will grow in the future. The second point is that already one of the three platforms is withdrawing, so we are skeptical of its profitability and sustainability. The third point is that we do not have any clear data on who the investors are, although it seems that there are two main groups: investors investing due to personal or business relationships, and individual investors hoping for an initial public offering (IPO).

##### Three issues

There are three main problems with crowdfunding in Japan going forward. The first is regulations. If regulations are excessive, they have a negative impact on a platform's profitability. The second is the sustainability of the platforms. The third is that while ECF is a primary market, there is no secondary market. This is a major problem because the investors who invest in ECF cannot sell equities anywhere and there is no liquidity in most cases.

Regarding regulations for ECF, screening or examination of potential crowdfunding platform users (companies soliciting funding) is regulated. Information sharing is also tightly regulated. The regulations for ECF are quite strict, raising quite a few problematic issues. Also, these regulations were made exclusively by the regulators, so we do not know if they meet the needs of the investors. Every party has to adhere to the regulations, so the regulations are putting pressure on the sustainability of the platforms and may be hindering the market growth.

Regarding the sustainability of the platforms, with the current, small market volume, the platforms' business models are not viable, because the 10-20% of the financing amount they charge as user fees is still insufficient to cover administrative and other business operations costs. Some companies have other revenue sources such as examination fees (mentioned above) and shareholder management fees, but they continue to struggle.

The liquidity of unlisted shares is also quite low and the shareholder community system itself also has many regulations. Those who participate in the shareholder community system are allowed to trade, but this means investment can only be solicited from investors within the community. In addition, in Japan, there is no base or foundation aimed at helping to support potential unicorns. Personally, I think the authorities are focusing more on preventing fraud rather than expanding the market. In order to increase the liquidity of unlisted shares, we must transform the platforms. At the same time, we need to create a secondary market using these platforms. Investors should be able to buy and sell shares on the platform. Blockchain technology may be useful for this purpose.

##### Three potential benefits of ECF

There are three main potential benefits with crowdfunding in Japan going forward. One is that it can be used as a market research tool. It is not just about financing, but that venture capital firms or start-ups can test their business models in the market. The second potential benefit is collective intelligence. When many people come together, overall intelligence level increases. It is something that we implement on a daily basis. By contributing many different opinions, we can enhance our intelligence and capability. I believe crowdfunding is an opportunity to increase and enhance collective intelligence. Third is the improvement of corporate governance. The ways companies view themselves is changing. Shareholders used to be the stakeholders, but with ECF, there is a greater sense of being a public company.

In conclusion, ECF in Japan is still in an early stage. It is expected to grow in the future, but there are many challenges. In order to expand the market, it is necessary to review not only the regulations of the primary market, but also of the secondary market. Lastly, I think crowdfunding can play a role in fostering SMEs and start-ups.

### Panel Discussion

Panelists:
Armin SCHWIENBACHER (Professor, SKEMA Business School, France)
Fabio BERTONI (Professor, EM Lyon Business School, France)

Moderator:
ONO Arito (Professor, Faculty of Commerce, Chuo University)

ONO:
What are the main differences between traditional equity financing and equity crowdfunding?

SCHWIENBACHER:
Equity crowdfunding is disintermediated, but research shows that crowds are generally passive.

MATSUO:
Equity crowdfunding is expensive with relatively high procurement costs, but there are advantages in terms of marketing and promotion.

ONO:
Is there an advantage for using equity crowdfunding compared to traditional equity financing?

SCHWIENBACHER:
With the crowd, decisions are made independently, there is variety in the people that participate. Thus, sometimes, the crowd can make wiser choices. But for that to happen, the crowd needs to be sufficiently knowledgeable. This is not clear today. However, equity crowdfunding is valuable in itself if it fills the equity gap.

BERTONI:
With blockchain, there are some applications where you get rewarded for predicting things accurately. In those situations, because you do not need detailed information, the crowd can have an advantage.

MATSUO:
I am not necessarily optimistic with collective intelligence because on the internet there is a lot of "junk" information which can influence the crowd. However, because of the number of individuals involved, it can be an interesting area for experimentation.

ONO:
Is ECF a viable method to finance start-ups, especially in countries with less developed markets?

SCHWIENBACHER:
One of the biggest challenges with ECF is that there is only a very small number of individuals who want to invest in individual stocks, even on the stock market where shares are listed and thus tradable. This limits the capacity of a country to mobilize investors also for equity crowdfunding.

MATSUO:
Right now, ECF is highly regulated compared to other options like ICOs. I think there needs to be more balance before ECF can become viable.

ONO:
What are their differences between ECF and ICOs?

SCHWIENBACHER:
The amount of money involved in ICOs is far bigger than in ECF. There is a lot of fraud in ICOs as well. With ECF, more information is available.

MATSUO:
While ECF is more domestic, ICOs allow investments in international markets.

ONO:
Do we need a well-organized platform to make ICOs more reliable?

BERTONI:
There are probably more ICOs that are scams than legitimate ones. The crowd is capable of filtering out most scams, but clearly some regulation is needed.

ONO:
Are blockchain technology and ICOs useful for the development of secondary markets for investors?

BERTONI:
On the secondary market, utility tokens will not work very well because either they are stable and not good for investors or they are unstable and not good for users.

SCHWIENBACHER:
Even utility tokens are potentially security tokens because you can trade them. When we look at the data, we see that people are not initially buying tokens for utility purposes.

ONO:
To what extent should we have regulations and who should be responsible for their development and enforcement?

SCHWIENBACHER:
We need to find additional ways to get the crowd involved. Currently, the crowd is just considered a source of money. I think the "testing the water" policy is one way to get them involved.

BERTONI:
Many exchanges are actually self-regulating. For example, many exchanges are enhancing internal policies to prevent "pump and dump" schemes. In addition, there are more and more ICOs where the token is designed from the beginning as a security token in such a way that it is subject to SEC (Securities and Exchange Commission) laws and regulations.

ONO:
Would it be beneficial to introduce institutional investors into ECF?

MATSUO:
If there is any conflict of interest between individuals and institutional investors, things will not work out. In addition, institutional investors may take profits from individual investors. There may also be the problem of information asymmetry.

ONO:
Is there a role for competition policies in ECF or blockchain?

BERTONI:
I do not think we need specific competition laws for blockchain, but the transparency makes it easier for incumbents to share information that is not possible to share in other industries. This creates opportunities for collusion.

ONO:
What kind of research will you be doing in the next few years?

SCHWIENBACHER:
I am not sure. Crowdfunding research started 10 years ago, and at the beginning, research was about understanding how it works and how to optimize it. This research now is on testing theories that we could not test well in the past. We now have a lot more information on individuals to do so. However, I think the research community first needs to think, in terms of ethical issues, how we can use this data before going further.

BERTONI:
I think that is more the case for blockchain where a lot of information is open. At the same time, because the information is not linked to an individual, there are no privacy issues. I think that is a very interesting field for research. Also, regulation is very different between countries, and even within a country, it evolves over time. This gives us the opportunity to study how differences in regulations affect things like equity financing.

MATSUO:
I think regulation is very interesting, especially the enforcement aspect. It may be interesting to study how regulations are enforced. I am also interested in the use of crowdfunding and start-ups in East Asia and Southeast Asia.

UDELL:
Even in well-developed formal venture capital markets, returns have been poor. With that in mind, do you expect ECF to fare better?

BERTONI:
I think it will be interesting to see whether ECF investors get good returns when they invest in companies that eventually make a lot of money. The crowd might just be a group of unorganized people that have no bargaining power, so what might happen is that the returns will go to the venture capitalists, even if they invested later.

SCHWIENBACHER:
I think the reason for the poor returns of venture capitalists is that there is a lot of new groups every year entering the market. A small number of well-established groups consistently outperform the market and a lot of the new groups fail. When you average this out, the return is poor.

BERTONI:
Right now, venture capital investment is very expensive. ECF could replicate venture capital strategies at a lower cost.

### Closing Remarks

HONJO Yuji (Faculty Fellow, RIETI / Professor, Faculty of Commerce, Chuo University)

As the presenters said, many drastic changes have occurred in the last 30 years. Having listened to the presentations, my impression is that we need to change our mindsets going forward. Those who make new things will require new financing technologies, and policy makers will have to react accordingly to ensure a new and active economy. We need to provide an environment where new companies can thrive, and we need policies to support that. Through mutual interactions such as these, we can achieve a new economy. To do accomplish this, we need changes, and we need changes to our current policies and regulations to allow that. Today, we heard the term "deregulation." This will be important in the future, especially for ECF which is heavily regulated. I think we should pose the question, "When should we change?" Well, I would like to quote Jack Welch who said "Change before we (you) have to."