Startup Equity Crowdfunding Grows in Europe (NESTA Report)

NESTA, the UK Innovation Foundation, has released the “The Venture Crowd“, a new report on crowdfunding as an investment tool. The report reveals that in 2011 alone, €1.5 billion was raised through crowdfunding for projects and businesses in need of funds. Amongst the different types of crowdfunding: Donation, Reward, Lending and Equity, the latter is on the rise as a fundraising mechanism for European startups.

For the purposes of the report, Equity Crowdfunding is defined as follows:

Equity crowdfunding is defined as the offering of securities by a privately held business to the general public, usually through the medium of an online platform. The model permits anyone to acquire a share in privately held businesses, i.e. those that have yet to float on a stock exchange, by allowing a business to offer a certain proportion of its equity for a set amount of capital it is aiming to raise. investors can then, through the platform, buy small parts of this equity stake.

It’s worth noting that angel investment platforms such as AngelList and CircleUp are excluded from this definition. While they provide huge value to the ecosystem and increase the density of network amongst startup and angel investors, they don’t unlock new sources of funding and don’t face the barriers of equity crowdfunding when dealing with a large number of non-accredited investors. The motivation for equity crowdfunding as an investment is intrinsic, driven by a combination of social and financial return. 

Below is a table of the equity Crowdfunding platforms operating in Europe:

The market opportunity for Equity Crowdfunding is ripe. Entrepreneurs are unable to access debt financing (bank loans) in the early stages of the startup, due to the risky nature of their business and typically lack of revenue. In the first stages, they rely on investments from FFF (Friends, Family and Fools) and business angels to launch their venture. Many companies shut down at this stage for lack of traction or their inability to raise funding. In order to achieve scale, startups require to raise venture funding, but to tap into VC funds, they would have had to reach a certain size or show the potential of exponential return. This is where equity crowdfunding comes in. If done correctly, it’s able to bridge the equity gap between the Angel stage (which seems to be moving upstream to higher amounts per cheque) and the VC funding (also moving up, typically starting from £2m rounds).

While the increasing adoption of Equity Crowdfunding is encouraging for startups, the model faces several challenges. Below is a quote from the report:

• Multiple motives. Openness can come with a cost to startups, as competitors, or investors in competing businesses could take part in equity crowdfunding. In addition, there will be different kind of investors mixed in one round, each with their own motivation, which can be damaging for the startup in case of a potential exit.
• Adequate due diligence. Participants in equity crowdfunding aren’t necessarily savvy investors, and can therefore struggle to perform adequate due diligence on the venture. Investors need to find a way to detect fraud, and leverage the wisdom of the crowds to understand the potential of a business and the reputation of the entrepreneurs. Tools like Klout, LinkedIn Recommendations, TrustCloud, Kred and even eBay seller ratings can be leveraged to facilitate the process. A UK startup that comes handy in this process is DueDil.
• Getting the right investors – More experienced investors would be helpful in providing evaluation support for smaller investors and platforms may want to consider how to entice them. Attracting the right businesses is another important task. not all businesses will be suited to crowdfunding and as the model develops, evidence needs to be generated to indicate what businesses it works best for.
• Regulation. one of the main barriers to the growth of the model thus far is regulation, which has hindered the expansion in the number of equity crowdfunding facilitators. As interest in the model grows, there is a greater need for clear legislation in the area and an efficient process for authorising platforms.

The report concludes that as this is a new area of research with relatively limited data, there are many open questions that would require additional research. Generally speaking, while equity crowdfunding is a challenging area for the risks discussed, it brings several advantages for investors, startups and even policymakers, who are all looking for growth – economic, social and financial.

Link to download the full report for more information and case studies: http://www.nesta.org.uk/home1/assets/documents/the_venture_crowd

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Eze Vidra

Co Founder and Managing Partner at Remagine Ventures

Eze is managing partner of Remagine Ventures, a seed fund investing in ambitious founders at the intersection of tech, entertainment, gaming and commerce with a spotlight on Israel.

I'm a former general partner at google ventures, head of Google for Entrepreneurs in Europe and founding head of Campus London, Google's first physical hub for startups.

I'm also the founder of Techbikers, a non-profit bringing together the startup ecosystem on cycling challenges in support of Room to Read. Since inception in 2012 we've built 11 schools and 50 libraries in the developing world.

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