New Report Looks at Impact of Crowdfunding on Startups in Europe

In 2011, European startups and other projects raised approximately €1.5 billion ($1.8 billion) through crowdfunding, according to a report from Nesta, an innovation focused foundation located in the United Kingdom. In The Venture Crowd, Nesta researchers found that a significant portion of those funds raised were by reward-based crowdfunding, where participants receive non-financial rewards in exchange for donating to a project. However, other crowdfunding models are growing rapidly including donation crowdfunding, crowdfunded lending and equity crowdfunding.

The report focuses on the recently adopted equity crowdfunding model, for which individual investors receive small stakes in a privately owned startup in return for investment and its rapid growth across Europe (approximately €9.9 million in equity was raised in 2011). Five online portals are the major facilitators of these investments via equity crowdfunding by connecting entrepreneurs with potential investors and seek funding from the crowd. Another three web portals are intended to launch by the end of this year.

The report contends that has the potential to be a complementary source of risk capital to the traditional providers in the market, offering finance to many businesses currently struggling to source investment. However, the model faces four challenges:

• Multiple motives — managing co-investment between various investors with different motivations for investing is one task that businesses and platforms will need to master.
• Refining the process — platforms need to find the best ways of stimulating collaborative evaluation by the crowd to give them every chance of selecting the best ventures.
• Getting the right investors and businesses — platforms may want to consider how to entice more experienced investors would be helpful in providing evaluation support for smaller investors and evidence needs to be generated on the businesses most suited for equity crowdfunding.
• Regulation — one of the main barriers to the growth of the model thus far in Europe is regulation, which has hindered the expansion in the number of equity crowdfunding platforms.

Although the report acknowledges these risks, it points out that several advantages for investors, startups and even policymakers including high-potential for economic, social and financial growth. Read the report...