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. • Alowing more entrepreneurial ventures to launch. Democratization • Allowing more investors to contribute to venture growth.
In 2015 the “Nordic Web” tracked 339 investments totaling $1.82 billion in the Nordic region. 30 Investments worth $85 million. (Source: http://www.thenordicweb.com/blog/the-nordic-funding-analysis-for-2015)
Crowdfunding Types - Funders receive an interest in the form of equity in the venture Equity-based they fund or, alternatively, revenue or profit-share arrangements. - Non-equity revenue-sharing - funders receive a fixed share of revenues and/or profits. - Funders often receive fixed periodic income and expect Lending-based repayment of the original principal investment. Split between: - Peer-2-Peer consumer lending. - Peer-2-Peer business lending. - Funders receive non-monetary rewards often take the form of a Reward-based token of appreciation or the pre-purchasing of products or services. - Funders donate to causes that they want to support, with no Donation-based expected compensation. (Based on: Crowdsourcing LLC Report, 2012; EY-Cambridge Alternative Finance Report, 2015)
When to do Crowdfunding? Crowdfunding Early Stage Crowdfunding Angel Investors Venture Capital Equity and Amount of capital need Business lending Crowdfunding Reward and Funding Gap Donation Institutional Crowdfunding Investors and Investment Banks Idea/ Prototype Startup Early Expansion Inception Growth (based on: World Bank (2013) “Crowdfunding Potential for the Developing World”)
Sources of Financing Internal - Income from sales. Reward CF Funds - Organic growth + retained earnings. - Asset-based financing. P-2-P Debt - cash flow financing. Lending Crowdfunding - Insider equity (bootstraping): Equity - Founders/ entrepreneurs - Friends and family . Equity CF -External equity: - Angel Investors - Venture Capital (VC) - Public Offering (IPO) - Government support agencies. Matching Support - Industry support agencies. Programs
Nordic Crowdfunding Facts and Figures In 2015: 10% of European CF Market (excl. UK) 2% of 194% European CF Market (incl. UK) € 32m 2012 (Based on: EY-Cambridge Alternative Finance Reports, 2015, 2016)
Nordic Crowdfunding Facts and Figures (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 (Based on: EY-Cambridge Alternative Finance Report, 2016)
But… WHY? • My subjective take on current challenges in Norway. 1 • Irrelevant and antiquated regulations (equity and lending). Regulatory • No clear effort to change these. Barriers • Should follow UK, Finnish and Danish examples. 2 • Traditional and low risk investment culture. Investment • Limited systematic incentives for high risk investment. culture • Limited efforts in attracting foreign investment. 3 • Mental barriers to sticking out and aggressive promotions. Culture • Expectation from the state to pay for everything. • Twisted perception that good ideas should be hidden. 4 • Support agencies don’t educate about crowdfunding. Lack of • Education institutions don’t educate about crowdfunding. knowledge • Media coverage lacking or dwelling on negative.
But… WHY YES? • My subjective take on current Opportunities in Norway. 1 • High on Internet adoption. Internet • High on social media adoption. adoption • High on e-commerce adoption and transaction. 2 • High income economy (6 th riches in GDP per capita). Money • Innovation-driven economy. availability • High disposable income. 3 • High trust society. Culture • Dugnad society. • Contributing donations (15 th place on world giving index). 4 • Generous but limited supply of government support. Hunger ? • Banks not offering loans to high risk, early stage startups. • Underdeveloped venture capital environment.
Best Norwegian Campaigns (so far) 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.
Nordic Crowdfunding Facts and Figures (Based on: EY-Cambridge Alternative Finance Report, 2016)
Greatest Challenge: Existing Regulation • 69% of platforms operating in the Nordic region indicate needs for regulatory clarifications and amendments. • Denmark and Finland leading the way. (Based on: EY-Cambridge Alternative Finance Report, 2015)
Greatest Challenge: Existing Regulation - Prospectus, Securities Markets, and Investment Services laws are Equity-based 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 - No clear regulation requirements in most countries. Existing Lending-based demands in some countries excessive. - Follow Danish approach to regulation as “payment service provider with limitations”. - Regulate as e-commerce transaction vis-à-vis consumer Reward-based 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 Donation-based processing times. Create exclusion laws for donation crowdfunding campaigns up to a certain amount (i.e. EUR 10.000). - Standardize authentication procedures across the countries. ALL - 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.
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