Crowdfunding is a disruptive way to finance individuals, companies, and projects via online marketplaces and electronic payment. Aggregating rather small amounts of capital from many individuals, projects or businesses can finally raise huge amounts and involve their community in its financing process. This sector is experiencing incredible growth since 2010. A recent report published by Cambridge University and Ernst&Young highlighted that the European crowdfunding market grew by 144% in 2014, from 1,2 billion euros in 2013 to nearly 3 billion euros in 2014. This increase is mainly due to many success stories showing that crowdfunding is a viable and effective source of funding for entrepreneurs, start-ups and SMEs in Europe.
In the report Crowdfunding for Impact in Europe and the USA, ECN and Toniic identified main benefits of crowdfunding for entrepreneurs, private investors and professional investors, listed below.
Some of the benefits for entrepreneurs:
- Favourable funding terms thanks to an open, market-driven valuation of their project;
- Lower transaction costs thanks to platforms using business models based on margins from a high number of transactions;
- Product, price and market validation through open customer feedback and peer review systems on platforms promoting interactive exchange of knowledge;
- A dedicated consumer and word-of-mouth marketing base obtained by engaging early on with potential customers and supporters of the project.
Some of the benefits of crowdfunding for private investors:
- Emotional connection and close identification with the enterprise, its team and goals, both prior to investment and during the investment period;
- Low-cost portfolio diversification across sectors or even multiple platforms;
- Due diligence and quick background checks on entrepreneurs and projects using public data available through social media and elsewhere, as well as commentary and feedback on the project on crowdfunding platforms;
- Opportunities to be an active investor by providing and reviewing comments and other input at all stages of the funding progress.
Some of the benefits of crowdfunding for professional investors:
- Social proof of an investment opportunity, product validation and measurable market reaction without additional cost;
- Built-in due diligence process by the crowd, verifying the background of projects and teams;
- Financial resources from crowd co-investment and sharing of financial risk;
- Expertise and advice from the crowd or individual co-investors benefiting project management during the investment period.
Not surprisingly, the European Commission is acting to untap crowdfunding potential to improve entrepreneurs, startups and SMEs access to finance in Europe.