The future of crowdfunding in Europe’s investment landscape

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crowdmain

The crowdfunding market in Europe continues to diversify. Having its roots in less complex variations like crowd donations, crowd-sponsoring and crowd pre-selling the market is expanding to the areas of crowd-lending, crowd insurance etc.

Now, steady growth in the area of crowd-investing is emerging. Crowd-investing, sometimes referred to as “equity-based crowdfunding”, is the exchange of money for a company’s shares/equity. It is currently the most complex variation of crowdfunding, but with the biggest average funding amount per event.

450 crowdfunding platforms worldwide, >300 per cent more in Europe 2012

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The crowdfunding scene is highly dynamic, especially since the crowd-investing segment prospects a growth of more than 300 per cent this year in Europe. According to the 2012 Crowd Funding Report from crowdsourcing.org, there are 450 crowdfunding platforms worldwide and this number is still rapidly increasing. In Europe nearly 15 per cent of all platforms focus on crowd-investing.

Despite many open questions, new platforms are starting their service every month. Which model and approaches will be capable of attracting viable startups? Which platforms will successfully fund more mature companies? Which business models will demonstrate feasibility and market performance? It’s still too early to know, but it seems that everybody want to be involved in the excitement.

The future, perhaps much sooner than later, will undoubtedly give rise to cases of financial loss, disappointment among investors and certainly also fraud, or at least attempted fraud. It is the responsibility of the major market players to improve the crowd investing model continuously to maintain trust and liquidity in the market in order to establish this model as an integrated part of the financing landscape for the startup ecosystem.

Fostering the emergence of viable startups, balancing the ecosytem

Potentially viable startups still suffer from lack of funding, because the relevant players like VCs, business angels and friends, families and fools are not capable of allocating enough resources to the ecosystem. Not only is the amount of funding in the traditional system insufficient, but also investment objectives, the ability to search and find promising ventures, as well as overall transaction costs are limiting factors.

Crowd-investing cannot replace the classical forms of financing instruments in the ecosystem. This is currently especially true for later funding rounds with massive sums of money. However, it can add substantial value to the system by fostering the emergence of viable startups that would otherwise not exist. It could also enhance the classical funding instruments of the market, for example by levering angel investments and could pay into getting more ventures investment ready for the big rounds. So crowd investing is at least an ecosystem-enriching complement for the classical forms of funding for innovative start-ups.

Will the crowd become a reliable part of the funding landscape?

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The future of crowd-investing is still in a flux and in order to develop to a major financing instrument the players still have some way to go.

Crowd-investing has to educate its private investors in terms of knowing the risks of their investment. When investing in young companies and especially innovative startups it is inherent that many projects will not succeed. It is crucial that investors know their risks and that the platforms assure that the risk of investing is properly communicated. Investors must be aware of their risk profile and be enabled to properly allocated and spread their money in this high-risk asset class. This is important in order to assure that crowd-investing stays a way to attract private risk money into the ecosystem.

This is what needs to happen, VCs and Angels…

Crowd-investment should seamlessly integrate into the existing funding system. It must be possible for a startup to have access between funding channels (ie. crowd-investing, bank, angel, VC) with every funding round. For example, start with a funding of product development by the crowd, than realise a massive market entry by a crowd and angel co-investment and after that, fund the international rollout with a classical VC.

This demonstrates a possible exit channel for the crowd investors before the regular contract period. It would also free up crowd money for the successive investments. To make this more likely, the crowd investing platforms must provide ways to keep the transaction costs low for following investors. This could be done by keeping the number of investors low, with good pooling solutions, or with a combination of both.

Platforms should provide ways to limit the impact of some hyper-optimistic private investors in order protect them and to keep the evaluations of the companies on a level that still is attractive for institutional investors in following financing round.

If the crowd investing scene is capable of adding sustainable value to the ecosystem, it has the opportunity to establish itself as a relevant financing instrument next to Angels and VCs. This could be done by creating a fair balance between the interests of crowd investors, professional investors and start-ups. Angels and VCs that recognize this will greatly profit from early cooperation with the platforms.

further reading

The 5 best Berlin Kickstarter campaigns

The future of crowdfunding, straight from the Valley