19. October 2012–
The concept of crowdfunding is currently experiencing a wave of popularity in Germany. Just since the beginning of 2012, the number of websites that act as interfaces between startups and investors have more than doubled.
Here, guest contributors Jan-Menko Grummer and Jan Brorhilker take a look at the active crowdfunding websites, along with websites about to be launched – and the scene in general.
From crowdfunding to crowd investing
It was US platform Kickstarter that transformed crowdfunding into a buzzword. The original plan was to create a new form of financing, to give creative projects and ideas that that have realistic financial needs a chance to gain funding. Kickstarter recently announced that, since 2008, more than 73,000 projects have been launched with a success rate of around 44 per cent. So far, more than $323million has been secured altogether in the successful funding rounds.
What’s the situation in Germany?
So far, only a limited number of startups in Germany have been financed via crowdfunding platforms. But the potential is huge and new financing oppurtunities have raised considerable interest from both founders and investors. In the past few months many new platforms have been launched while others are preparing to go live. Currently, the barriers to this market place are still low as all the platforms in Germany are still in early phases, which allows them to differentiate themselves from others in the market.
Financing a startup with crowdfunding
For the startup scene, the crowdfunding trend is exciting. Crowdfunding via online platforms offers them an ideal means of financing, even when they are in their early phases. By using crowd funding, entrepreneurs receive valuable feedback, both from the platform and potential investors... If a startup isn’t able to mobilise enough supporters, this can be the first indication that the business idea will not be popular or that the business needs to work on their pitch.
If a funding round is successful, it has a very positive effect on the profile of businesses. It can also be a helpful stepping stone in the development of the business, as crowd investors don’t only offer capital but also business ideas.
However, due to the very different contractual organisation of each platform, it's important both for startups and investors to critically examine and compare the proposals individually. When an investor picks a platform and sees plenty of investment alternatives at hand, the potential to distribute the risk via building up a portfolio is an option.
Crowdfunding cannot, however, be considered a safe bet.
That an investment will be a dead loss is never ruled out. Inexperienced investors are especially in danger of being convinced that investments on the platform are a sure success, a easy assumption to make as the startups are professionally presented and must go through a selection process to get on the platform. Some platforms are putting in the effort to make sure the investors completely understand what they're investing in. Innovestment, for example, puts more emphasis on having only a few quality startups rather than a huge number on site.
A few crowd funding platforms in summary...
Considering numbers from August of this year, Seedmatch, with their 7,600 registered users and 12,000 active investors, is the most active corwdfunding platform. (This could be because the platform was one of the first to be launched.) Competing with Seedmatch is Innovestment, with a very high number of funding rounds. For a platform to be successful, companies need a general acceptance of the concept, along with the trust of all involved.
Unlike most other crowdfunding platforms, Innovestment offers a market-based business appraisal. This is achieved by hosting an auction in which shares in startups are sold. Through this, startups are assured that the interested investors are willing to pay and agree to the conditions and valuation of the business. The investors are able to take their time considering the business model and asking questions about it, as investments shouldn’t be made under time pressure.
This means that Innovestment is targeting a very specific investor group. The overwhelming number of investers are in leadership roles and have a great deal of business experience, offering startups constructive feedback, coaching and networking.
Seedmatch is the first mover and shaker in the German crowdfunding scene. Not only does it have the largest crowd, it also has the fastest funding speed (at just 87 minutes for the fastest financing rounds). Startups pitch to over 8,500 potential investors and the site has a 100 per cent success rate: all startups that qualify for a funding round on Seedmatch are successfully financed. Not only that, but 17 of 21 startups have managed to gain the maximum funding of €100,000. Seedmatch also helps startups by providing relationships between the investors and the startups.
The founders of Mashup Finance don’t only offer project funding via their platform but also invests in the startups themselves. They also don’t demand any returns from the funding in the first three years, aside from taxes and wins the startups gain.
Mashup Finance doesn't only fund great ideas but are also interested in solid business models, which may or may not be reflected in the fact that the first funding round went to a chicken stall.
"Our motto 'Invest local' allows us to invest in the bakery around the corner, or the cool shop down the road. Following this objective, in the long term we want to focus on the city of Munich (maybe Bavaria generally), because at the moment we only have enough business contacts here. We don’t finance ideas that are purely internet-based and we bring investors together with the businesses. They talk in a café and get to know each other,” Mashup Finance says.
The most unique characteristic of Gründerplus is its focus on startups in ecommerce, giving the platform a niche position in the crowd investment market.
Another defining feature is that it doesn’t only finance startups, but also established businesses. The minority investment is, at just 50 euros, a lot lower than most of the competition.
They have a close connection to the largest online trade society in Europe, which has over 14,0000 established online presences. The Gruenderplus GmbH makes a profit by using these structures and a wide network of contacts, including over 250 partners in the ecommerce branch along with countless founders and investors.
The BaFin Lizenz has been ordered and all is ready for the first official offer on Bergfürst to be made, according to the business.
The potential investments are theoretically unlimited as partnerships are established through people using their own capital to buy shares in the businesses. Bergfürst is also planning a trading centre that can secure longterm and realtime information for investors.
At Companisto there are low minimum investment sums, with investments starting at €5. The site is aimed at popular startups as the bigger the fanbase, the more successful the business, according to the platform.
By using the Companisto system, startups don't need to deal with any administrative tasks. Companisto is also the only affiliate — so it doesn't matter if there are 200 or 2,000 Companisten involved, startups only deal with Companisto.
At the moment the average investment at Companisto is about €220. The Companisto crowd is young, web savvy and well-connected, they're investors that are eager to get involved in the startups. The investments are usually between €5 and €5000 per person.
It’s important that the investors receive not only part of the wins, but also of the profits from a potential exit.
Projects can fail. But why?
It can be hard to identify the factors that make crowdfunding projects a success or a flop as people investing in the project tend to blame external grounds for failures.The following list shows some of the reasons for these failures, however should not be viewed as conclusive.
Even if a startup is able to receive funding, it doesn’t necessarily mean that a business will develop successfully. The support system on the platform is often overestimated. While the platforms often are there to advise startups, they are typically only officially involved in the arbitration between crowd investors and businesses. Basically, it's only the managers that can be held responsible for the success of a business.
An important factor in determining a startups success is external trust in the project. A well planned PR campaign and involvement in different channels on social media is essential, especially when these are established early on.
The feedback from people affiliated with the business is critical, as while independent feedback from an unknown third party is often more revealing, they are often inexperienced and do not give constructive criticism. It's important that feedback is objective, both when positive and negative. Emotions are not welcome.
Crowdfunding is time intense. The amount of time you have to spend communicating with interested people and possible investors should never be underestimated. The already high workload at startups is raised once again – so plan to have the staff capacity to keep up.
Hurdles for crowd funding in Germany
Crowdfunding in Germany is at the beginning of its development. The potential is very high, but we’ll have to wait to see how the market develops and whether the following hurdles can be overcome. Some of the crowdfunding sites have made suggestions on how to improve the current situation.
Seedmatch wants, along with the simplification of sales laws, a stronger recognition by politicians, so that crowdfunding can reach its potential faster. Mashup Finance sees mid- to long-term problems in characteristically risk averse Germans and points to the relatively small amount of the population that own shares.
“Crowdfunding finds itself in a grey zone when it comes to the law. It is important to define the rights, laws and standards of crowdfunding, to ensure the process it is clear and easily executed,” says Gründerplus. The first initiative leading towards a simplified system is a roundtable of crowdfunding platforms that is on its way to being initiated by the German crowdsourcing organisation.
Another problem, according to Companisto, is that it is hard to convince people to invest in startups when they are not yet profitable.
The devil is in the details
In the next article, I will go into more depth on the crowdfunding platforms and highlight the differences between the platforms. For example, I will explore the process the platforms go through to select the startups, the different ways they evaluate the businesses and the hold the investors have in the success of a business, along with a closer examination of the maximum realistic amounts that can be expected in financing rounds.
Translated by Michelle Kuepper
For related reading, check out
Crowdfunding a startup: now open for investors (but not on Kickstarter)
Indiegogo’s Danae Ringelmann in Berlin – crowdfunding, building “a goddamn Tesla museum” and what to do with $15 million
Battle for Capital – Banking and VCs versus Crowdfunding and Crowd Investing