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
