What exactly is crowdfunding and what are its benefits?
In its current form, crowdfunding is a relatively simple, platform-based online fundraising process. The platform functions as an investment club, where members are admitted after KYC protocols to view the investment offerings, alias pitches, that have been reviewed by the platform operator in accordance with the applicable law.
Having been admitted to campaign the offering, the campaigns’ success is a function of a proper online communication. The campaign owner presents the investment offer with a short video, pitch deck, term sheet and business plan, and initiates online communciation with the prospective investors, first of all, with his/her own network. Using social media as much as possible during the 4-10 week-long campaign, the more people are reached, the greater the chance to succeed in this form of fundraising.
Since November 2021, the European Crowdfunding Service Providers Regulation exempts offering under EUR 5M p.a from the Prospectus obligation.
Crowdfunding provides a solution to several economic problems.
Entrepreneurs are underserved by banking services. Startups, MSME’s and tech companies are rarely bankable, but they do need capital. To connect with the right investors in time crowdfunding can be the right choice.
A crowdfunding campaign enables an entrepreneur to convert their network and customers into investors and turn investors into customers. Hence, it’s the most efficient way of raising capital. 85% of the capital at this stage comes from within a 120 km geographical radius of the founders. The crowd keeps on asking questions from the campaign initiator, and if it loses faith due to opaque uncertainties, the campaign wouldn’t succeed. (Withdrawal of the initial indication of interest is allowed, so investors can change their minds). The World Bank called it the Wisdom of the crowd or crowd diligence, which is supposed to be even stronger than legal due diligence. However, the latter is also executed before the new capital is set at the disposal of the campaign initiator.
The campaign helps build a brand and significantly increase customer loyalty simultaneously.
By finding investors to the pitch, the entrepreneur validates the service and the business model, which also helps easier fundraising rounds from institutions in the future
By raising funds in an early stage, the entrepreneur implements a corporate governance approach that accelerates a startup’s journey to the IPO stage.
On the macro level, by turning small retail savings into large amounts into an investment without significantly increasing the aggregate risks in the economy, the competitiveness and resilience of the complete economy are strengthened. Channeling dormant capital (that is EUR 16 BLN in Hungary only ) into the economy is an evergreen challenge to policymakers.
All these benefits can be harnessed through a well-organized crowdfunding service provider. This is the essence of Tokeportal.
The global crowdfunding market
The global crowdfunding market reached EUR 10.92 billion in 2021. Statista forecasts that it will double by 2027. The annual rate of growth is around 11%.
The first publication of the draft European Crowdfunding Service Providers Regulation (ECSPR) was released in March 2018, which capped the capital raised through crowdfunding to €5 million per campaign per year. The regulation was adopted in October 2020 and is now applied in all EU Member States since November 2021. This allows already operating service providers to convert their existing national licenses into licenses that comply with the EU-wide regulation and thus provide cross-border services across the EU.
Global alternative (non-bank) financing, including angel and venture capital investments, amounted to EUR 101.1 billion in 2020. The US and Canada accounted for EUR 65.86 billion and Europe for EUR 8.9 billion of the total amount. Crowdfunding is still a small yet growing part of alternative financing. In Europe, EUR 736.9 million was invested in new businesses in 2020. Two-thirds of that turnover was generated in the UK, where around 1700 businesses have raised capital since 2011. That is roughly half of the number of venture capital-backed companies in that period. Crowdfunding still only represents approximately 5% of the UK venture capital market. However, considering that it has only been around for ten years, it is a decent number.
The most successful crowdfunding campaigns in 2020 were from technology-, food-, and fashion related sectors. Mobile apps, fintech services, platforms and webshops, artificial intelligence, and cosmetics were also very successful. Tokeportal’s first successful investment campaigns, such as Potzak.org (EUR 42k), Solarbnb (EUR 117k) and Las Vegan’s (EUR 270k), were also part of this sector.
According to the latest International Alternative Finance Report, equity crowdfunding volume in Central Europe increased from EUR 24.92 million in 2019 (28% of the total Central European volume) to EUR 54.29 million (44%) in 2022.
Campaigns with a capital requirement between EUR 40k-280k have been very successful in the Hungarian market, which was only launched in 2020. Nevertheless, there are plenty of international examples of multi-million € campaigns.
