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Foundations of control

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… Refresh your memory on the issues relevant to control on pp. 351 - 365, such as what takes place as managers control, comparing actual to planned performance, managerial action, and when control takes place.  Then, read this article, about the upcoming changes to crowdfunding legislation, and what it means for start-ups seeking crowd funding.  

So, to summarise…

Here’s the problem with business borrowing money from banks: the banking system is basically designed to take money from those who have less, and to give it to those who have more.  Here’s the funny version of this issue, the long serious version of this issue, and a UK-based movement addressing this issue.  The other problem with turning to banks for loans, is that basically, banks become those who determine what we invest in, what we develop, and what we support.  It is not a very democratic process.  Banks just vote for what they think has potential to make money, and that is that.

But this is about to change.  Crowdfunding allows you to get your own group of investors.  It used to be restricted to charity kind of endeavours, where people rallied up behind causes they wanted to donate to, but now, new legislation will make it possible for you to not only support the development of something you wish was there, or something you believe in, but also to be part of its success.  You can now become an equity partner: part of the investors of the business. 

It hasn’t been very easy to do that in Australia so far: why? Because the rules and regulations made it very difficult for investors to invest.

Investors needed to prove that they were ‘sophisticated’: basically, that they have more than $2.5 million worth of assets, and a salary of $250,000 or more.  This means that if you wanted to invest in an idea which could potentially make you rich, you had to have already been rich.

New legislation will make it easier for “mums and dads”, or people with less assets than described before, to invest in businesses.  It will also mean that the business will not have repay the money raised the same way they have to repay banks.  With banks, you typically have a weekly or a monthly repayment plan, and if you fail to repay amounts on time, banks will usually take action, such as seizing your assets.

Other forms of capital raising for start-us include venture capitalists, who will monitor the start-up’s progress, and then intervene, if they think things are not going well.  A major benefit of working with a venture capitalist is that they provide more than money.  They provide access to expertise, which may be needed if things derail.

Some issues to notice and pay particular attention to here are…

  • What to measure
  • Correcting actual performance
  • When control takes place

Consider the following questions for discussion…

  1. What elements relevant to control can you identify in the article?  Refer to Figure 13.4 on p. 358.  When should control take place for each of these elements?
  2. What kind of measures that are used by the Federal Government, through laws, to control investments, as mentioned in the article?  What kind of measures would you use if you were in charge of the upcoming reform?
  3. What type of control is typically used in investments of capital in start-up companies?  Why do you think these types are predominant, and not others?
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