Equity Crowdfunding in Europe: Fragmented

Equity crowdfunding completely disrupted the funding of young companies. Now, it is possible for individuals to invest small money in startups (often along with super angel investors who were first investors in Twitter, Facebook, Evernote,..) who keep searching for new investment opportunities. Startup financing is no longer a privilege of venture capital funds and is becoming available almost to everyone. It is tempting to have a chance to invest early in Facebook. On the other hand, the mortality of startups is high and platforms’ operators must make big efforts to explain these risks.

Will equity crowdfunding transform the capital markets? According to top crowdfunding experts, a decent diversified portfolio of investments via equity crowdfunding will produce higher returns than any other asset. The payback from equity crowdfunding can be enormous. But it will be very hard to achieve Facebook or Dropbox returns 62,000% and 39,000% ROI, respectively. Equity crowdfunding takes local angel investing and makes it global, without sacrificing quality, via various platforms and investment syndicates. Today much angel investing is relegated to local deals and that makes sense. But as Crowdvalley founder Markus Lampinen told Venturebeat, “New access and transparency created by online models will open the door for discovering new investment opportunities in private securities potentially anywhere. Along with the right information, research and processes to protect investors and evaluate the cases, this can lead to a new paradigm where we as investors are not limited to our own local community, but can access information from around the world.”

CrowdSourcingWeek lists the top 15 platforms in Europe and new platforms appear every month. Currently in Europe there is a patchwork of national legal frameworks related to equity crowdfunding and harmonized EU regulation is missing. Therefore, only the UK, Germany and Scandinavia seem to have popular equity crowdfunding platforms, similar to more advanced platforms in the US. Regulation is needed for obvious reasons. Investing in startups is very risky. Three of four startups die and pay no returns. Therefore, it is very important that those who invest are aware of those risks. Some equity crowdfunding plaforms are therefore open only to qualified investors who pass qualification tests and get accreditation. Some platforms are open to wealthy individuals.

European equity platforms can already show some success stories. FundedByMe was founded in Stockholm, Sweden, in March 2011 and is one of the first crowdfunding platforms in the world to offer both reward-based and equity crowdfunding. The platform has a major focus on European entrepreneurs to facilitate cross-border investments that benefit both entrepreneurs and investors to assist with job creation and economic growth. FundedByMe operates on a global scale and has offices in Sweden, Finland, Denmark, Norway, Spain, Germany, Italy and Singapore. In July 2014, the Finnish interactive yoga platform Yoogaia successfully closed their crowdfunding round via FundedByMe at €100K. Only three months later they succeeded to attract one of the leading venture capital firms in the Nordics, Inventure, and raised €500K for further development and expansions. But this is the only successful exit / follow-on investment so far. Since the launching of equity crowdfunding in 2012 FundedByMe has closed 42 such cases in Europe and Asia. In total, FundedByMe has raised over €6M in thousands of campaigns since 2011.

I see one big problem with European equity crowdfunding platforms — missing support of experienced angel investors as we see in the US  or Israel  —  “invest with notable investors” via their investment syndicates. This is missing in Europe, so far. European angel investors are not interested in having “mini VCs” around them, with a few exceptions. But some great actions are planned (mainly in Scandinavia) and European angels are willing to cooperate, team up and monitor further oppotunities abroad.

EBAN — The European Business Angels Network is doing a lot..

The European Commission sees the benefits of equity crowdfunding for SMEs. But it is reluctant to take any actions that would support cross border deals. “The EC is exploring the potential and the risks of this relatively new and growing form of finance, as well as the national legal frameworks applicable to it, in order to identify whether there is value added in European level policy action in this field” ..this is what the EC has been saying for three years.

I am working on a book which will show best practices of some European young companies that have raised money via equity crowdfunding plaforms. Sign up here. Some stories will be published here, too.