Funding

Funding is the act of providing resources to finance a need, program, or project. While this is usually in the
form of money, it can also take the form of effort or time from an organization or company. Generally, this
word is used when a firm uses its internal reserves to satisfy its necessity for cash, while the term financing
is used when the firm acquires capital from external sources.

Sources of funding include credit, venture capital, donations, grants, savings, subsidies, and taxes.
Fundings such as donations, subsidies, and grants that have no direct requirement for return of investment
are described as "soft funding" or "crowdfunding". Funding that facilitates the exchange of equity
ownership in a company for capital investment via an online funding portal per the Jumpstart Our Business
Startups Act (alternately, the "JOBS Act of 2012") (U.S.) is known as equity crowdfunding.

Funds can be allocated for either short-term or long-term purposes.

Economics
In economics funds are injected into the market as capital by lenders
and taken as loans by borrowers. There are two ways in which the
capital can end up at the borrower. The lender can lend the capital to a
financial intermediary against interest. These financial intermediaries
then reinvest the money against a higher rate. The use of financial
intermediaries to finance operations is called indirect finance. A lender
can also go to the financial markets to directly lend to a borrower. This
The flow of funds from lender to
method is called direct finance.[2]
borrower.

Purpose of Funding

Research funding

Research funding is funding used for research-related purposes. It is

most often used to describe funding in the fields of technology or
social science. The allocation of funds are usually granted based on a [1]
Types of financing/funding
per project, department, or institute basis stemming from scope of the
research or project. Research funding can be split into commercial and
non-commercial allocations. Research and development departments of a corporation normally provide
commercial research funding. Whereas, non-commercial research funding is obtained from charities,
research councils, or government agencies.[3] Organizations that require such funding normally have to go
through competitive selections. Only those that have the most potential would be chosen. Funding is vital in
ensuring the sustainability of certain projects.

Launch a business
Entrepreneurs with a business concept would want to accumulate all the necessary resources including
capital to venture into a market. Funding is part of the process, as some businesses would require large
start-up sums that individuals would not have.[4] These start-up funds are essential to kick-start a business
idea, without it, entrepreneurs would not have the ability to carry out their concepts in the business world.

Uses on investment

Fund management companies gather pools of money from many investors and use them to purchase
securities. These funds are managed by professional investment managers, which may generate higher
returns with reduced risks by asset diversification.[5] The size of these funds could be as little as a few
millions or as much as multi billions. The purpose of these funding activities is mainly aiming to pursue
individual or organization profits.

Methods of Funding

Government Grants

Government could allocate funds itself or through government agencies to projects that benefit the public
through a selection process to students or researchers and even organizations. At least two external peer-
reviewers and an internal research award committee review each application. The research awards
committee would meet some time to discuss shortlisted applications. A further shortlist and ranking is made.
Projects are funded and applicants are informed.[6] Econometric evidence shows public grants for firms can
create additionality in jobs, sales, value added, innovation and capital. For example, this was shown to be
the case for large R&D grants,[7] as well as smaller public grants for the tourism firms[8] or small and
medium sized firms in general.[9]

Crowdfunding

Crowdfunding exists in mainly two types, reward-based crowdfunding and equity-based crowdfunding. In
the former, small firms could pre-sell a product or service to start a business whereas in the latter, backers
buy a certain amount of shares of a firm in exchange of money.[10] As for reward-based crowdfunding,
project creators would set a funding target and deadline. Anyone who is interested can pledge on the
projects. Projects must reach its targeted amount in order for it to be carried out. Once the projects ended
with enough funds, projects creators would have to make sure that they fulfill their promises by the
intended timeline and delivery their products or services.[11]

Raise from investors

To raise capital, you require funds from investors who are interested in the investments. You have to present
those investors with high-return projects. By displaying high-level potentials of the projects, investors
would be more attracted to put their money into those projects. After a certain amount of time, usually in a
year's time, rewards of the investment will be shared with investors. This makes investors happy and they
may continue to invest further.[12] If returns do not meet the intended level, this could reduce the
willingness of investors to invest their money into the funds. Hence, the amounts of financial incentives are
highly weighted determinants to ensure the funding remains at a desirable level. Venture Capital (VC) is a
subdivision of Private Equity wherein external investors fund small-scale startups that have high growth
potential in the long run. Investors receive a portion of the company’s equity in return for the money
invested by them. The amount of money that a Venture capital firm can raise is predominantly built on the
Principal-agent relationship between the Limited Partners and the Venture Capital Firm.[13]

Self-Organized Funding Allocation

Self-organized funding allocation (SOFA) is a method of distributing funding for scientific research. In this
system, each researcher is allocated an equal amount of funding, and is required to anonymously allocate a
fraction of their funds to the research of others. Proponents of SOFA argue that it would result in similar
distribution of funding as the present grant system, but with less overhead.[14] In 2016, a test pilot of SOFA
began in the Netherlands.[15]

Securing loans
A company or an individual may secure a loan to get access to capital. Often borrowers must use a secured
loan where assets are pledged as collateral. If the borrower defaults, ownership of the collateral reverts to
the lender. Both tangible and intangible assets can be used to secure loans.[16] The use of IP as collateral in
IP-backed finance transactions is the subject of a report series at the World Intellectual Property
Organization.[17]

Withdrawal of funding
Withdrawal of funding, or defunding, occurs when funding previously given to an organisation ceases,
especially in relation to Governmental funding.[18] Defunding could be as a result of a disagreement or
failure to meet set objectives. An example that explains the withdrawal of funding in this case is that of
President Trump's decision to stop funding the World Health Organization (WHO) over alleged
Coronavirus mismanagement.[19]

See also
Foundation (non-profit)
Investment
Investment fund
Crowdfunding
Peer-to-peer lending
Research funding
Seed money
Micro finance
Mutual fund
Trust Fund
Equity fund
Intangible asset finance

References
1. Kaschny, Martin (2018). Innovation and Transformation. Springer Verlag. ISBN 978-3-319-
 78524-0.
2. Mishkin, Frederic (2012). The Economics of Money, Banking and Financial Markets (Global,
Tenth ed.). Pearson Education Limited. p. 68. ISBN 978-0273765738.
3. Imperial College London(2014) Types of research funding [Online] Available at:
http://www3.imperial.ac.uk/researchsupport/funderinformation/typesofresearchfunding
(Accessed:15 October 2014)
4. GOV.UK(2013) Start Your Own Business [Online] Available at https://www.gov.uk/starting-
up-a-business/get-funding (Accessed: 18 October 2014)
5. U.S. Securities and Exchange Commission( 2010) Mutual Fund [Online] Available at:
https://www.sec.gov/answers/mutfund.htm (Accessed: 19 October 2014)
6. Stroke Association(2009) Research funding process [Online] Available at:
http://www.stroke.org.uk/research/research-funding-process (Accessed: 21 October 2014)
7. Howell, Sabrina T. (2017). "Financing Innovation: Evidence from R&D Grants" (https://doi.or
g/10.1257%2Faer.20150808). American Economic Review. 107 (4): 1136–1164.
doi:10.1257/aer.20150808 (https://doi.org/10.1257%2Faer.20150808).
8. Srhoj, Stjepan; Vitezić, Vanja; Walde, Janette (2021). "Do small public grants boost tourism
firms' performance?" (https://doi.org/10.1177%2F1354816621994436). Tourism Economics.
28 (6): 1435–1452. doi:10.1177/1354816621994436 (https://doi.org/10.1177%2F135481662
1994436).
9. Dvouletý, Ondřej; Srhoj, Stjepan; Pantea, Smaranda (2020). "Public SME grants and firm
performance in European Union: A systematic review of empirical evidence" (https://doi.org/
10.1007%2Fs11187-019-00306-x). Small Business Economics. 57: 243–263.
doi:10.1007/s11187-019-00306-x (https://doi.org/10.1007%2Fs11187-019-00306-x).
10. Clifford, C.(2014) Crowdfunding Generates More Than $60,000 an Hour (Infographic)
[Online] Available at: http://www.entrepreneur.com/article/234051 (Accessed: 22 October
2014)
11. Kickstarter, Inc.(2010) "Seven things to know about Kickstarter" [Online] Available at:
https://www.kickstarter.com/hello?ref=footer (Accessed: 23 October 2014)
12. Raise Capital(2011) "Business talk - How to raise capital for a hedge fund" [Online]
Available at: http://www.raise-capital.com/raise-capital-for-hedge-fund.php (Accessed: 24
October 2014)
13. Raza, M. Tanzeem; Natarajan, P. (January 2023). "Factors Driving Venture Capital
Investments in India" (http://journals.sagepub.com/doi/10.1177/23939575221139944).
Journal of Entrepreneurship and Innovation in Emerging Economies. 9 (1): 62–79.
doi:10.1177/23939575221139944 (https://doi.org/10.1177%2F23939575221139944).
ISSN 2393-9575 (https://www.worldcat.org/issn/2393-9575).
14. Bollen, Johan (8 August 2018). "Who would you share your funding with?" (https://doi.org/1
0.1038%2Fd41586-018-05887-3). Nature. 560 (7717): 143. Bibcode:2018Natur.560..143B
(https://ui.adsabs.harvard.edu/abs/2018Natur.560..143B). doi:10.1038/d41586-018-05887-3
(https://doi.org/10.1038%2Fd41586-018-05887-3). PMID 30089925 (https://pubmed.ncbi.nl
m.nih.gov/30089925).
15. Coelho, Andre. "NETHERLANDS: A radical new way do fund science | BIEN" (https://basici
ncome.org/news/2017/05/netherlands-radical-new-way-fund-science/). Retrieved 2 June
2019.
16. Security interests in intellectual property. Toshiyuki Kono. Singapore. 2017. ISBN 978-981-
10-5415-0. OCLC 1001337977 (https://www.worldcat.org/oclc/1001337977).
17. "Launch of new WIPO report series on unlocking IP-Backed Finance at Singapore's IP
Week, 26 August 2021 – Sharing the Singapore Country Report" (https://www.wipo.int/sme/e
n/news/2021/news_0006.html). www.wipo.int. Retrieved 2021-12-24.
18. "The definition of defund" (https://www.dictionary.com/browse/defund). www.dictionary.com.
Retrieved 7 October 2018.
19. Cohen, Joshua. "Trump's Decision To Defund WHO For Coronavirus Response: Throwing
The Baby Out With The Bathwater" (https://www.forbes.com/sites/joshuacohen/2020/04/15/tr
umps-decision-to-defund-who-throwing-the-baby-out-with-the-bathwater/). Forbes. Retrieved
2021-07-08.

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