The 2008 financial crisis crippled the global economy. For Europe, the
recovery has been tenuous, witnessing the lack of confidence in the
sustainability of individual nations, and dwindling trust in the
financial services and banking industry.
While the strategy for economic recovery has focused on fiscal
policy and the banking system, the brunt of the financial burden is
placed on small businesses and entrepreneurs. These groups are left
without funding for their businesses, without the security of a bank
loan, and without access to credit lines from the financial services
industry. To contextualise the gravity of this problem, we would like to
point out that the 23 million small and medium sized enterprises (SMEs)
in Europe represent 99% of businesses. Thus, access to capital for SMEs
is critical for sparking job creation in Europe.
Today one of the most promising tools to help enable economic
growth, job creation, and innovation is crowdfunding. We believe
crowdfunding is one of the most viable means of funding new ideas, small
business and job creation across Europe. It is a highly democratic tool
that is posed to have a disruptive impact on community, start-up and
consumer finance by allowing value creation on many levels, not just
financial.
It must be the civil and ethical duty of European politicians
and citizens to find a solution to the economic crisis. We believe the
crisis provides an opportunity for much-needed change. Change, albeit
disruptive, if managed well, is a guarantor for innovation. Crowdfunding
can play a part in this and we would like to ask policy makers as well
as market players to collaborate in order to enable the provision of
funds and non-financial support to innovative and creative projects,
start-ups and SMEs accross Europe.
For the full paper, please download the PDF document, which I worked on with Dan Marom, Ronald Kleverlaan and Kistof de Buysere and which has seen contributions from nearly 30 industry experts and the support from 30 businesses and organizations, at www.crowdfundingframework.eu and read it, then circulate it.
Towards an enabling ecosystem for new ways of funding innovation and SMEs
The European Commission has stated as its aim to support
the business environment for SME’s and promote successful
entrepreneurship. Research shows the majority of job creation comes from
small and medium sized businesses, which account for 99% of all
businesses in Europe. The vast majority of these have ten or fewer
employees.
At the same time, uncertainties resulting from the on-going squeeze on credit availability are made worse by never-ending threats of systemic disruption in the financial markets. For European SMEs and entrepreneurs, but also for individuals, non-profits or creative projects, this has led to a threatening shortage in funding.
In order to provide adequate sources of funding, crowdfunding should be integrated into the European Commission’s aim in support of SMEs. The disruptive nature of crowdfunding can help fill the funding gap, but it also brings several nonfinancial benefits, such as validation of product features, market segmentation, price and demand, pre-sales and marketing.
The crowdfunding industry is small yet vibrant. Last year, the Europe market raised around €300 million or one third of the world market, considering all types of crowdfunding. At the end of 2011, there were around 200 crowdfunding platforms active in Europe. Their number is expected to increase by 50% by the end of 2012.
However, in its many forms, crowdfunding too often is stalled by different European regulatory approaches to financial intermediation and investing. This is even truer where national regulatory interpretation have displayed a tendency to lag behind the establishment of the common market itself.
There is no European regulation specifically designed to support crowdfunding, but many that are applicable. For example, when marketing equity investments, existing regulation across Europe harmonises fundraising above €5 million and below €100,000. The gap in-between, which is one starved for equity capital, is left to the 27 national regulators to interpret. The result does not foster pan-European crowdfunding and does not create a level playing field within the Union.
If Europe is to realise the true potential of crowdfunding, there must be a collaborative and open discourse amongst the industry, regulators, and citizens in order to generate the necessary consent on best practices, reflecting the needs and specifics of different crowdfunding business models. European, national and regional legislators and policy makers should join forces to establish crowdfunding-enabling legislation in Europe with the aim to support entrepreneurship, innovation and job-creation.
First published at crowdfuture
At the same time, uncertainties resulting from the on-going squeeze on credit availability are made worse by never-ending threats of systemic disruption in the financial markets. For European SMEs and entrepreneurs, but also for individuals, non-profits or creative projects, this has led to a threatening shortage in funding.
In order to provide adequate sources of funding, crowdfunding should be integrated into the European Commission’s aim in support of SMEs. The disruptive nature of crowdfunding can help fill the funding gap, but it also brings several nonfinancial benefits, such as validation of product features, market segmentation, price and demand, pre-sales and marketing.
The crowdfunding industry is small yet vibrant. Last year, the Europe market raised around €300 million or one third of the world market, considering all types of crowdfunding. At the end of 2011, there were around 200 crowdfunding platforms active in Europe. Their number is expected to increase by 50% by the end of 2012.
However, in its many forms, crowdfunding too often is stalled by different European regulatory approaches to financial intermediation and investing. This is even truer where national regulatory interpretation have displayed a tendency to lag behind the establishment of the common market itself.
There is no European regulation specifically designed to support crowdfunding, but many that are applicable. For example, when marketing equity investments, existing regulation across Europe harmonises fundraising above €5 million and below €100,000. The gap in-between, which is one starved for equity capital, is left to the 27 national regulators to interpret. The result does not foster pan-European crowdfunding and does not create a level playing field within the Union.
If Europe is to realise the true potential of crowdfunding, there must be a collaborative and open discourse amongst the industry, regulators, and citizens in order to generate the necessary consent on best practices, reflecting the needs and specifics of different crowdfunding business models. European, national and regional legislators and policy makers should join forces to establish crowdfunding-enabling legislation in Europe with the aim to support entrepreneurship, innovation and job-creation.
First published at crowdfuture
The Crowdfunding Promise
In Europe some 23 million small and medium sized enterprises (SMEs) represent 99% of businesses. SMEs are widely acknowledged drivers of innovation, job creation and economic growth. However, there are very limited funding mechanisms that share the risk of investing in innovation and job creation for the absolute majority of these businesses. There exists a small offering of business angels and venture capitalists that are estimated to reach less than half a per-cent of SMEs with equity investments each year. All other risk carrying equity investments are undertaken by family, friends and fools. A number of debt and micro-credit products exist for SMEs with relevant equity or other assets, but the financial crisis and the upcoming Basel III rules are likely to lead to a further decline in overall lending.
The shortage of adequate funding tools and access to capital for SMEs has long been identified as a key restraint to innovation and job creation. Currently, one of the most promising tools to fund innovative and entrepreneurial projects and SMEs is crowdfunding. The basic concept crowdfunding is not something completely new, but an innovation based on an existing practice. Web and mobile technology, services and applications offer a collaborative environment for increasingly internet savvy citizens. It is precisely this web environment that has contributed to the advance of crowdfunding: funding a project by pooling a large number of small investments where individuals invest not only financial resources, but also time and expertise. This is usually based on an open and transparent information exchange that scrutinises and validates innovative concepts and funding proposals.
Crowdfunding is not going to replace existing financial services any time soon, but it is going to complement and support the existing infrastructure. It will help companies and projects through donations, loans, pre-sales and equity to smooth income fluctuations or to fund growth during the early phases of development. It will add value to existing incumbent financial offerings to SMEs. For the entrepreneur, crowdfunding can provide critical insights that other funding possibilities do not offer to the same extent - including the validation of product features, segmentation, price and demand as well as pre-sales and pre-ordering. No other investment form, be it debt or equity, can provide this insight without additional costs.
The number of crowdfunding platforms active across Europe can be estimated to be around more than 200, representing all types of business models. The total amount of funds raised via crowdfunding in Europe can be estimated to reach around €450 million for 2011. This converts roughly to more than 600,000 individual fundraising campaigns across the various types of crowdfunding platforms – compared to the estimated €3.9 billion invested in around 4,800 SMEs by European venture capital in 2011. While the total crowdfunded amount still seems small, the year-on-year growth rates for crowdfunding indicates a potential market in value equal to European venture capital within just a couple of years.
There can be little doubt as to the promise of crowdfunding as a basic and democratic concept - with its success rooted in a mix of intrinsic, social and financial motivations. There can also be little doubt about its prospective global impact through computer and mobile networks. However, the full potential of crowdfunding will only be reached if regulation and legislations are drawn up with a global and enabling view rather than a local or disabling one. Today, financial regulation leaves much of the aspects around crowdfunding untouched or open to different interpretations across Europe, thus resulting in up to 30 different interpretations on a national level.
To this end the European Union would benefit from a harmonised regime that enables crowdfunding in its variety of services, understanding the different nature and motivations in comparison to incumbent financial services, while at the same time protecting customers from misuse. In particular certain aspects of the Prospectus, MiFID, UCITS and AFIM directives, as well as others, need clarification with regard to the changes an increasingly open and digital society is expecting from financial services.
By implementing crowdfunding as a sustainable and safe offering to both, entrepreneurs and investors alike, Europe will be able to mobilise resources worth billions of Euro to be invested in customer approved and co-created innovation and entrepreneurship – and to support much needed economic growth across member states.
This article was first published on Social Innovation Europe on 4 October 2012
The shortage of adequate funding tools and access to capital for SMEs has long been identified as a key restraint to innovation and job creation. Currently, one of the most promising tools to fund innovative and entrepreneurial projects and SMEs is crowdfunding. The basic concept crowdfunding is not something completely new, but an innovation based on an existing practice. Web and mobile technology, services and applications offer a collaborative environment for increasingly internet savvy citizens. It is precisely this web environment that has contributed to the advance of crowdfunding: funding a project by pooling a large number of small investments where individuals invest not only financial resources, but also time and expertise. This is usually based on an open and transparent information exchange that scrutinises and validates innovative concepts and funding proposals.
Crowdfunding is not going to replace existing financial services any time soon, but it is going to complement and support the existing infrastructure. It will help companies and projects through donations, loans, pre-sales and equity to smooth income fluctuations or to fund growth during the early phases of development. It will add value to existing incumbent financial offerings to SMEs. For the entrepreneur, crowdfunding can provide critical insights that other funding possibilities do not offer to the same extent - including the validation of product features, segmentation, price and demand as well as pre-sales and pre-ordering. No other investment form, be it debt or equity, can provide this insight without additional costs.
The number of crowdfunding platforms active across Europe can be estimated to be around more than 200, representing all types of business models. The total amount of funds raised via crowdfunding in Europe can be estimated to reach around €450 million for 2011. This converts roughly to more than 600,000 individual fundraising campaigns across the various types of crowdfunding platforms – compared to the estimated €3.9 billion invested in around 4,800 SMEs by European venture capital in 2011. While the total crowdfunded amount still seems small, the year-on-year growth rates for crowdfunding indicates a potential market in value equal to European venture capital within just a couple of years.
There can be little doubt as to the promise of crowdfunding as a basic and democratic concept - with its success rooted in a mix of intrinsic, social and financial motivations. There can also be little doubt about its prospective global impact through computer and mobile networks. However, the full potential of crowdfunding will only be reached if regulation and legislations are drawn up with a global and enabling view rather than a local or disabling one. Today, financial regulation leaves much of the aspects around crowdfunding untouched or open to different interpretations across Europe, thus resulting in up to 30 different interpretations on a national level.
To this end the European Union would benefit from a harmonised regime that enables crowdfunding in its variety of services, understanding the different nature and motivations in comparison to incumbent financial services, while at the same time protecting customers from misuse. In particular certain aspects of the Prospectus, MiFID, UCITS and AFIM directives, as well as others, need clarification with regard to the changes an increasingly open and digital society is expecting from financial services.
By implementing crowdfunding as a sustainable and safe offering to both, entrepreneurs and investors alike, Europe will be able to mobilise resources worth billions of Euro to be invested in customer approved and co-created innovation and entrepreneurship – and to support much needed economic growth across member states.
This article was first published on Social Innovation Europe on 4 October 2012
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