What is Crowdfunding? Current trends, Challenges and opportunities - - PowerPoint PPT Presentation

What is Crowdfunding?

Current trends, Challenges and opportunities in the Nordic Region

February 2017

Shneor, Rotem

What is Crowdfunding?

Definition:

• “The practice of funding a project or venture by raising many small

amounts of money from a large number of people, typically via the Internet”. (Oxford Dictionary) What is it good for?

• Alternative source of early seed funding for entrepreneurial ventures.
• Conceptual fine-tuning through real-time interaction with stakeholders.
• Opportunity to recruit initial customer base and brand promoters.

Democratization

• Alowing more entrepreneurial ventures to launch.
• Allowing more investors to contribute to venture growth.

(Source: http://www.thenordicweb.com/blog/the-nordic-funding-analysis-for-2015)

In 2015 the “Nordic Web” tracked 339 investments totaling $1.82 billion in the Nordic region.

30 Investments worth $85 million.

Crowdfunding Types

Equity-based Lending-based

• Funders receive an interest in the form of equity in the venture

they fund or, alternatively, revenue or profit-share arrangements.

• Funders often receive fixed periodic income and expect

repayment of the original principal investment. Split between:

• Peer-2-Peer consumer lending.
• Peer-2-Peer business lending.

Reward-based Donation-based

• Funders receive non-monetary rewards often take the form of a

token of appreciation or the pre-purchasing of products or services.

• Funders donate to causes that they want to support, with no

expected compensation.

(Based on: Crowdsourcing LLC Report, 2012; EY-Cambridge Alternative Finance Report, 2015)

• Non-equity revenue-sharing - funders receive a fixed share of

revenues and/or profits.

When to do Crowdfunding?

Amount of capital need

Idea/ Inception

(based on: World Bank (2013) “Crowdfunding Potential for the Developing World”)

Prototype Startup Early Growth Expansion

Funding Gap

Reward and Donation Crowdfunding Equity and Business lending Crowdfunding Venture Capital Institutional Investors and Investment Banks Angel Investors

Crowdfunding Early Stage Crowdfunding

Sources of Financing

Internal Funds Debt

• Income from sales.
• Organic growth + retained earnings.
• Asset-based financing.
• cash flow financing.

Equity

• Insider equity (bootstraping):
• Founders/ entrepreneurs
• Friends and family.
• External equity:
• Angel Investors
• Venture Capital (VC)
• Public Offering (IPO)

Support

• Government support agencies.
• Industry support agencies.

Crowdfunding Reward CF P-2-P Lending Equity CF Matching Programs

Nordic Crowdfunding Facts and Figures

(Based on: EY-Cambridge Alternative Finance Reports, 2015, 2016)

2012

€ 32m 194%

In 2015:

10% of European CF Market (excl. UK) 2% of European CF Market (incl. UK)

Nordic Crowdfunding Facts and Figures

(Based on: EY-Cambridge Alternative Finance Report, 2016)

(Based on: EY-Cambridge Alternative Finance Report, 2016)

Nordic Crowdfunding Facts and Figures 2015

(Based on: EY-Cambridge Alternative Finance Report, 2016)

Crowdfunding volumes per capita 2015

€ 0.26 Norway

But… WHY?

Investment culture

• Traditional and low risk investment culture.
• Limited systematic incentives for high risk investment.
• Limited efforts in attracting foreign investment.

2

Culture

• Mental barriers to sticking out and aggressive promotions.
• Expectation from the state to pay for everything.
• Twisted perception that good ideas should be hidden.

3

Lack of knowledge

• Support agencies don’t educate about crowdfunding.
• Education institutions don’t educate about crowdfunding.
• Media coverage lacking or dwelling on negative.

4

• My subjective take on current challenges in Norway.

Regulatory Barriers

• Irrelevant and antiquated regulations (equity and lending).
• No clear effort to change these.
• Should follow UK, Finnish and Danish examples.

1

But… WHY YES?

Money availability

• High income economy (6th riches in GDP per capita).
• Innovation-driven economy.
• High disposable income.

2

Culture

• High trust society.
• Dugnad society.
• Contributing donations (15th place on world giving index).

3

• My subjective take on current Opportunities in Norway.

Internet adoption

• High on Internet adoption.
• High on social media adoption.
• High on e-commerce adoption and transaction.

1

Hunger ?

• Generous but limited supply of government support.
• Banks not offering loans to high risk, early stage startups.
• Underdeveloped venture capital environment.

4

Oslo-based Red Thread Games raised close to USD 1,5 mil for developing a sequel to the ‘Longest Journey’ game series. Oslo-based Linjer raised USD 966K for their design luxury watch line(+ USD 36K on Indiegogo) + USD 380K for their design leather bags line (+ extra 369K on Indiegogo). Vass-based Kitemill raised close to USD 1 mil for developing a their airborne energy systems. Hamar-based Krillbite Studio raised close to USD 248K for developing their ‘Among the Sleep’ horror adventure game. Stavanger-based Future Home raised close to USD 200K for bringing their home control systems to market. Oslo-based Cloud Solutions raised close to USD 195K for their software platform for the global insurance industry. Oslo-based Snow Castle Games raised close to USD 178K for developing their ‘Earthlock’ role playing game. Gol (Buskerud)-based Bad Norwegian raised close to USD 174K for developing their skin care company.

Best Norwegian Campaigns (so far)

(Based on: EY-Cambridge Alternative Finance Report, 2016)

Nordic Crowdfunding Facts and Figures

• 69% of platforms operating in the

Nordic region indicate needs for regulatory clarifications and amendments.

• Denmark and Finland leading the

way.

Greatest Challenge: Existing Regulation

(Based on: EY-Cambridge Alternative Finance Report, 2015)

Greatest Challenge: Existing Regulation

Equity-based

• Prospectus, Securities Markets, and Investment Services laws are

irrelevant in the age of Internet and online communities.

• Follow Finnish approach through creating special register for

crowdfunding intermediaries with simpler, faster procedures.

• Provide clear requirements for crowdfunding intermediary’s

procedures and its obligations towards the investor.

• Reduce capital requirement from platforms to EUR 50.000.
• Allow equity rounds of up to EUR 5 Million annually from unlimited

number of investors.

• Simplify disclosure documents by businesses seeking to raise

funding via equity crowdfunding. Use Finnish model of maximum 6 page document addressing all critical questions including risks.

• Allow tax deductions from losses on investments via crowdfunding,

as applied in the UK (up to 88% of net loss).

Greatest Challenge: Existing Regulation

Lending-based

• No clear regulation requirements in most countries. Existing

demands in some countries excessive.

• Follow Danish approach to regulation as “payment service

provider with limitations”.

Reward-based Donation-based

• Regulate as e-commerce transaction vis-à-vis consumer

protection and taxation laws.

• Enact reduced VAT to support startups, cultural and social

projects (within limitations of firm size and age).

• Where relevant remove obstacles in license/permit fees and long

processing times. Create exclusion laws for donation crowdfunding campaigns up to a certain amount (i.e. EUR 10.000).

ALL

• Standardize authentication procedures across the countries.
• Standardize KYC requirements from at least EUR 5000 and up.
• Allow for cross border authentication among Nordic countries.

Nordic Crowdfunding Platforms 2014

Nordic Crowdfunding Platforms 2017

But what about the banks ? …

Launched own crowdfunding platform in Finland in May 2016. Has formal cooperation with Invesdor in Finland, where the bank sends relevant clients for equity crowdfunding services through the partner platform. Has a team working on the banks crowdfunding engagements, exploring both own solutions and partnerships with existing

• platforms. No formal policy taken, but bank officials active and

present in crowdfunding forums. All other major banks looking into this in one form or another, mostly under veil of secrecy.

But what about the banks ? … examples outside Norden

Santander UK provides £200,000 to community projects, charities and enterprises that are focused on social change across the UK. Santander will donate half the funding target of a project once it raises 50 per cent from the public online. Allianz France set up a dedicated investment fund on the Smart Angels platform to co-invest on a par with its clients. Allianz France co-invests automatically the same amount within a limit of 50,000 euros per investor per company.

BNP France has invested in the Ulule platform itself, and has established a fund where each euro contributed by the crowd to selected projects, is automatically doubled by the foundation (up to 1,000 euros). BNP Belgium established, owns and runs the HelloCrowd.

Commerzbank Germany launched own P2P Business lending platform in June 2016. Facilitating loans ranging between €200,000 and €10 million.

Sweden-based Earin raised USD 1,6 million for producing the world’s smallest wireless ear buds. Norway-based Red Thread Games raised USD 1,5 million for developing a sequel to the successful ‘Longest Journey’ game series. Sweden-based PUGZ raised USD 1,4 million for producing the smallest wireless ear buds charged by phone. Norway-based Linjer raised USD 966K for their design luxury watch line + USD 380K for their design leather bags line (+ extra 369K on Indiegogo). Sweden-based Laser Unicorns raised USD 630K for producing a film titled “Kung Fury”. Sweden-based Flyte raised close to USD 617K for producing their levitating light bulb. Sweden-based Memoto raised USD 550K for producing the Lifelong Camera and App. Denmark-based REC Watches raised USD 460K for their line of design watches from recycled materials from mustangs.

Nordic Stars on

(Source: http://www.kickstarter.com/)

Denmark-based Mate.Bike raised close to USD 4,25 million for their line of “cool and affordable e-Bikes”. Finland-based SpineGym raised close to USD 1.7 million for their back and abs training apparatus (+ extra USD 460K on Kickstarter) Denmark-based Airtame raised close to USD 1,5 million for developing their wireless HDMI solution. Denmark-based AIAIAI raised close to USD 1,4 million for developing their modular headphone system with HD wireless solution. Sweden-based Wheelys raised closed to USD 1.39K for promoting their mobile café concept (in 4 campaigns). Finland-based QuietOn raised close to USD 1,3 million for their active noise cancelling ear pluggs. Sweden-based Flic raised close to USD 961K for developing their wireless smart button. Finland-based Iron Sky Universe raised close to USD 831K for film production as part of the Iron Sky film series (in 2 campaigns).

Nordic Stars on

(Source: http://www.indiegogo.com/)

Nordic Crowdfunding Alliance (Today)

The Nordic Crowdfunding Alliance is a mechanism facilitating collaborative effort among key players committed to developing an ever more crowdfunding-friendly Nordic region, while supporting entrepreneurial growth in the region.

The alliance members are jointly responsible for successfully helping entrepreneurs, artists and social ventures raise EUR 12,6 million in period between mid-2012 to Dec-2015.

• EUR 9,2 Million in equity-Crowdfunding of 59 projects (average EUR 156K).
• EUR 3,4 million in reward-Crowdfudning of 1227 projects (average EUR 2,691).

Representing a thriving and growing Nordic Crowdfunding community:

• Over 100.000 community members across the Nordic countries.

Nordic Crowdfunding Alliance - Facts and Figures

Nordic Crowdfunding Alliance – Current Activities

Education Community Knowledge exchange Public debate Research

• Market education through national and international reach
• ut events presenting opportunities and challenges of

crowdfunding.

• Development of a Nordic community of supporters, via

possibilities for cross-country and cross-platform contributions to Nordic campaigns.

• Knowledge sharing and learning exchanges among

stakeholders in a new and emerging industry.

• Engaging in public discussion of crowdfunding via Media

contributions, Education, Lobbying and Research.

• Building unique infrastructure for research for long-term

cutting edge studies on crowdfunding in the Nordic context.

Nordic Crowdfunding Alliance - Facts and Figures 2012-Dec 2015

Booomerang (Denmark) Bidra.no (Norway) Karolina (Iceland) Mesenaatti (Finland) Type Reward Reward+ Donation Reward Reward # Successful campaigns 511 89 194 194 Success rate 36% 30% 79% 68%

(* for period mid-2012 to Nov-2015)

Invesdor (Finland) Equity + Lending 45 41%

Record Breaking Camapaigns (2012- july 2016)

Booomerang (Denmark) Bidra.no (Norway) Invesdor (Finland) Karolina (Iceland) Mesenaatti (Finland) Velocator

(smart GPS tracking for Bicycle)

EUR 53.894

(DKK 401,000)

Fair & Square

(Fashion brand)

EUR 51.000

(NOK 476,258)

Cityvarasto

(storage facilities firm)

EUR 1,037,385 Stundin

(newspaper)

EUR 45,520

Finnish Museum

• f Games

(Museum)

EUR 85,860 Ahola Transport (logistics firm) EUR 2,017,858 The Rally Museum (museum) EUR 86,420 Breaking Records 2015-2016 Reykjavik Media (news website) EUR 100,170

Where did money go to? (Jan 15-Jul 16)

Campaign category % Music, Arts and Entertainment 37,5% Social and political initiatives 14,0% Production of Books and Magazines 13,9% Lifestyle, Leisure and Sports 9,1% Charity causes 7,4% Consumer goods 7,2% Restaurants and cafes 3,1% Games and gaming 1,6% Other 6,2%

Reward+Donation campaigns on NCA member platforms Jan 15-Jul 16

(Total 1043 campaigns)

Where did money go to? (Jan 15-Jul 16)

Campaign category % Software and apps 25% Lifestyle, Leisure and Sports 14,5% Bio, Health and Medical 12,5% Consumer goods 12,5% Games and gaming 4,2% Restaurants and cafes 4,2% Music, Arts and Entertainment 2,1% Other 25%

Equity campaigns on NCA member platforms Jan 15-Jul 16 (total 48 campaigns)

Reasons for refusing campaigns

Purpose

• Moral, Ethical and social aspects.
• Unbacked claims of dubious nature.

1

• Up to 55% of proposed reward-based campaigns, and up to 80% of

equity-based campaigns are refused publication.

Goals

• Unrealistic targets and goal sums.
• Excessive valuations of own project.

2

Project

• Unorganized and non-responsive project owners.
• Insufficient planning and information about project.

3

Code of Ethics

to providing information in good time to crowdfunders or potential corwdfunders with regard to platform services and all costs and related charges.

1

• We the members of the Nordic Crowdfunding Alliance commit :

2 3

to a due diligence and authentication process when approving projects and individuals prior to campaign publication, in accordance with each platforms guidelines. to publish campaigns in accordance with nationals laws, and those that are not against or hurting human rights of third parties (individuals or groups).

Code of Ethics (continued)

to use best filtering practices for avoiding publication of campaigns including false, inaccurate and misleading information.

4 5 6

to accept campaigns where campaign owners are actively engaged and fully committed to campaign completion. to best security practices in IT systems and data protection.

Main campaign success factors

Pro-active Networking

• Dedication and persistence in social media interactions.
• Active networking throughout campaign process.
• Capitalize on existing fan and network base.

1

Attractive Presentation

• Attractive, good and clear project description.
• Use of images and videos.
• Highlighting unique aspects of concept.

2

Good Preparation

• Attractive and fairly priced rewards.
• Reasonable valuations and target/goal sums.
• Plan for communication via multiple media channels.

3

Based on qualitative analysis of 202 evaluation statements about the 68 best campaigns, and 154 evaluation statements about the 68 worst campaigns in Jan 2015- Jul 2016:

Crowdfunding Campaign Process

Preparation Execution Relationship

Pre--campaign Campaign Post--campaign

• Define the project’s

purpose and needs clearly.

• Review and learn from

similar earlier projects.

• Chose platform.
• Build mailing lists.
• Warm-up existing network.
• Invest in quality content.
• Build social media reach
• ut plan.
• Build attractive

rewards/returns or compensation schemes.

• Contribute to others’.
• Provide constant updates

and information.

• Reply quickly to

comments, questions and requests from the crowd.

• Activate network for

contribution and social media and WoM reach out.

• Contact media, bloggers,

experts and influencers.

• Follow up on promises to

contribute.

• Ensure dynamic process

and developments.

• Provide constant updates

and information.

• Continue replying to

comments, questions and requests from the crowd.

• Deliver on campaign

promises on time.

• In case of delays, problems

report honestly and timely.

• Invest in learning about

new members in network.

• Reciprocate by

contributing to others’ campaigns.

Some interesting facts and figures

• According to an interview with Indiegogo founder in 2011 (HuffingtonPost 2011):
• Campaigns with video receive 122% more funding than campaigns with only text.
• Campaigns involving teams raise 70% more than those with just one person involved.
• Spelling errors in crowdfunding campaign texts decrease the chance of

success by 13% (StartupInnovation.org).

• Once crossing the 30% milestone, statistics suggest that crowdfunders have

nearly a 90% rate of success (Crowdclan 2013).

• On Kickstarter, about two-thirds of women-led projects reach their funding

goals, which is compared with a little less than one-third of male-tech ventures. The research showed that women are 13% more than likely to meet their goals

• n the crowdfunding giant (Crowdfundinsider 2014).

But is it worth it? (from – Capital Crowdfund Advisors Report on 73 campaigns)

Source: http://www.forbes.com/sites/cherylsnappconner/2014/01/21/new-report-the-roi-of-crowdfunding/#11eb81225cd8

• 1. Does Crowdfunding produce sales?
• Yes. Across all methods (rewards, debt and equity). Average quarterly increase in sales

(not including the revenue raised through crowdfunding) of 24%. For equity-based raises an average of 341% increase in post crowdfund quarterly sales.

• 2. Does Crowdfunding create jobs?

Yes, it does, though not in large numbers. 39% of respondents hired an average of 2.2 new people after crowdfunding. An additional 48% reported the intent to use the crowdfunding proceeds to create additional jobs.

• 3. Does Crowdfunding deter follow-on investment?
• No. Within three months of successful crowdfunding, 28% had completed rounds of

traditional investment with angels or traditional venture capitalists. An additional 43% were in talks with institutional investors.

• 4. What is the ROI of Crowdfund Investing?

Every hour invested in a crowdfund campaign returned $813 on average.

1. Shift in platform management from idealistic activists to professional entrepreneurs. 2. Platforms shifting from technology to community focus. 3. From domestic to international expansion of platforms. 4. Ongoing rise of equity-crowdfunding. 5. Rise of niche platforms (real-estate, renewable energy, sports).

10 Reflections …. What next?

6. Front and/or back-end consolidation of small platforms. 7. Regulatory amendments and adaptations across countries:

• Clear exclusion clauses from prospectus laws for equity campaigns.
• New license classes for P-2-P lending platforms.

8. Crowdfunding education will increase and move to mainstream. 9. Increasing professionalism of campaign management.

• 10. The crowdfunding campaign support and preparation industry will

grow, especially with respect to equity.

10 Reflections …. What next?

Thank you for the attention…

• Dr. Rotem Shneor

School of Business and Law, University of Agder, Norway E-mail: rotem.shneor@uia.no Nordic Crowdfunding Alliance www.nordic-crowdfunding.com