The key to European crowdfunding success lies in industries core principle – cooperation
Just to remind, the type of crowdfunding is defined by the benefits that fundraisers offer to the crowd in return for their contribution.
There are the following types:
- Donation: which does not foresee any benefit for the crowd at least material,
- Reward: in this case the crowd of investors receives a product that fundraisers intend to produce, a book that the fundraiser is writing, or a new gadget produced by a high-tech company,
- Lending: this type allows the crowd to become a bank providing funding to companies in return for receiving interests and lent amount repayment during the period of time,
- Equity: is used by companies where in return for funding they offer to the crowd shares of the business, in essence the crowd becomes the owner of the company and gets returns in case of success or losses if the company fails.
Role of crowdfunding in the modern economy
According to different sources, global crowdfunding volumes are estimated at USD ~170 billion in 2021 and according to https://www.technavio.com/ global crowdfunding will add another USD 240 billion in the next 5 years making it a substantial player in the funding industry.
Crowdfunding provides the crowd with the power to decide which initiative, businesses, and people to support. It can happen in many ways and on different scales, like a local bakery asking neighbours for EUR 5,000 or a corporation raising EUR 75 million, funds are raised to provide clean water to distant villages or building a solar farm to fight climate change. Basically, you name it!
If executed right, crowdfunding can play a substantial role in the economy and in a social environment. In the USA, crowdfunding scaled fast, there are crowdfunding platforms that fund USD 3 billion p.a., a donation platform that in the last 10 years raised USD 9 billion from 120 million donors thus becoming noticeable players in the economy.
In essence, via crowdfunding, the crowd partially takes over the role of banks, venture capital, and even governments and decides who gets funding.
Development of the EU crowdfunding industry and its current state
Long story short, EU crowdfunding is significantly underdeveloped compared to the UK, USA, and Chinese crowdfunding industries.
In general, Europe is the third-largest crowdfunding market in the world. According to statista.com, in 2020 alternative funding (that mainly consists of different types of crowdfunding) volumes in Europe reached USD 22 billion. Sounds good until you start digging deeper and find out that the UK accounted for 60% leaving behind the EU’s main countries with just less than USD 10 billion. So why it is so? Why do the EU’s top 3 crowdfunding countries have the same volumes as one USA crowdlending company?
Given that historically USA and UK citizens were more active in investing, we could make the assumption that Europeans are not so eager to invest in general and prefer saving the money. But the market shows differently, according to www.brusselstimes.com every 10th European household has invested in cryptocurrency or 20 million EU households have some digital coins. This is clearly a sign that Europeans are looking for opportunities to invest and are ready to invest in new technology-driven products.
So why do they invest in crypto but not in crowdfunding?
By their nature, crypto and crowdfunding have a lot in common. Both are talking about decentralization of economies, giving people more power to decide, both are driven by technology, and they appeared at the same time as responses to failed bank systems after the 2008 crisis. Even more, products like ICO and equity crowdfunding are the same thing only technology differs.
The answer is quite obvious, EU crowdfunding simply lost the popularity contest.
In the USA, crowdfunding industry has done a way better job of promoting itself. In its early stage, USA market developed through collaborations that allowed them to grow and reach large auditory fast. Lending Club was the first app on Facebook that allowed them to reach millions and secured USD 10 million Series A funding round already in the second operational year. IndieGoGo worked together with MTV to develop a new content that helped to reach a significant crowd.
As a result, some USA platforms provide billions in funding gathered from +100 million backers while the 27 EU platforms have less volume than the UK alone.
Reasons for the EU crowdfunding losing the popularity contest
The biggest EU crowdfunding industry problem is fragmentation.
In past, most EU countries designed crowdfunding regulations in a way that platforms could operate only in their home market and/ or limited platforms’ ability to approach other countries’ investors.
As a result, (most) platforms had to choose a narrow focus and remain relatively small, offering a few deals per month to investors; on the other hand, businesses who wanted to reach the whole EU crowd had to look for platforms without those limitations and thus often ended up using the UK platforms.
All this had a domino effect, none of the players were able to become big enough to promote the industry on a large scale, which lead to “investors” deficit that resulted in high investor costs thus platform services costs were relatively high for fundraisers and platforms could not take many deals because of risk of not reaching the target amount.
And needless to say that small offering lead to poor UX since investors had to use several platforms to secure decent offerings and low volumes and high investor costs kept platform profitability low limiting their improvement capabilities.
Thus, now the big question whether it is over for EU crowdfunding or there is still hope? Of course, it is! Recently introduced pan-European regulation provides more opportunities for growth and collaboration and instant industry growth shows that there is a demand and now it is up to the industry to fix problems and make crowdfunding mainstream.
Preconditions for the EU crowdfunding market growth
The new regulation has opened doors for pan-European crowdfunding expansion; however, it is not a panacea itself, business problems like poor UX and high investor and fundraiser acquisition costs remain.
So, what to do?
To succeed it is needed to provide easy access to a wide range of crowdfunding opportunities across Europe. There are two options for how it could be done: (1) merger of platforms or (2) like the market developed in a similar situation in other industries via aggregators, such as BIgTech – Booking, Amazon, Skyscanner, and so on.
How aggregators can help the EU crowdfunding industry to grow
The key aggregators’ functions are to improve, popularize and standardize.
Let’s start with improvement. The key role of the aggregator is to provide easier access to wider offerings in parallel removing other barriers and simultaneously improving the user experience.
Investment is one of the fastest-changing industries in finance thus to keep up with rapid change, a constant dialogue with customers and quick response are needed. Given the platform size, it might be hard to adapt to changing markets quickly because of a lack of resources and/or simply not being aware of upcoming innovations.
The aggregator can collect information about the market need quicker and from a wider audience and develop a required solution on its level providing benefit for all parties, thus every single platform does not have to develop the same solution.
Popularize. Unlike the USA, where the platform managed to grow extremely fast becoming well known and gaining resources to promote the industry as such, in the EU none of the platforms managed to reach such scale.
Therefore, to ensure that crowdfunding gains more popularity there should be players that can consolidate resources from many platforms and use them to promote the industry.
Standardization is one of the must-haves for industry. There is no unified standard on how a great crowdfunding business should work. Yes, regulation is introducing a minimum set of requirements with which platforms should comply, but crowdfunding competes with well-established industries thus “minimum” is not enough.
To properly evaluate the deal investors have to be able to compare deals from different platforms on the same criteria, and here we are not talking about plain data about deals, but how data is structured and what analysis is available to investors, how operational risk is managed and so on.
When you invest in stocks you get very well-structured analytics, so why crowdfunding should be different?
Aggregators are the ones who have to take the role to introduce this standardization in the market. Associations can take this role as well, but aggregators may have a close dialogue with customers that ensure a better understanding of customer needs.
A similar effect could be achieved by the merger of platforms, but it requires several platforms to merge to achieve meaningful results that will take a long time, while aggregators can unite 10s of platforms under one umbrella relatively quickly.
Crowdfunding aggregators in the EU and their development
The idea of creating an aggregator for the EU crowdfunding market is not a new one, there were and are several of them.
The “classical” aggregators like crowdinfrom.com took a similar approach and tried to aggregate crowdfunding deals from various platforms. Some took a narrow approach and aggregated deals only from specific industries like real estate or sustainability, some decided to go for the bigger market and in addition to the EU aggregated deals from the USA, Australia, etc.
To be honest, at this stage none of the aggregators reached substantial results, even more, a number of them stopped operating.
And here is the reason why? It takes two to dance tango. Pan-European regulation exists but there is no pan-European market. Most of the platforms are not rushing forward to acquire pan-European crowdfunding licenses and with an initiative to extend the “transition period,” we might not see a “united” crowdfunding market until 2024.
But it is clear: the longer platforms wait the harder it will be for them to go pan-European.
We already see that some bigger players started thinking about that and announced mergers that will help them “easier” win the competition, like Invesdor, OneCrowd, Stockcrowd IN, and believe many more to come.
So, to not be left behind, platforms should go cross-border and find a partner to grow together.
Crowdfunding was born in Europe, and it can become a huge game changer in our market. If we look wider, crowdfunding is more than just a fundraising tool, it gives people the power to make a huge change.
Let’s take green energy as an example; while governments are talking, people can act. Green energy crowdfunding platforms are becoming more popular in Europe but imagine if instead of crypto EU citizens would invest in green energy. Europe already would be carbon neutral and people who invested would receive their income share.
Wouldn’t it be awesome? And nothing stops us to do so, and it is just starting.
As you already understood I am a huge crowdfunding fan and I truly believe in its role in making the world a better place.
But to get there, we need to start working together!
Responsibility for the content of publication lies with the author.