CrowdfundingHub is the European Expertise Centre for Alternative and Community Finance with the aim of building an alternative finance ecosystem, supporting the growth of crowdfunding, community finance and other forms of alternative finance.
The Amsterdam-based research and consultancy network of crowdfunding and alternative finance experts throughout Europe has recently released a study on equity crowdfunding on which Oliver* wrote talking about the brand-new concept of serial crowdfunding.
Among the main findings of the study, realized in partnership with AIG, there is the fact that an estimated €5.4 billion was successfully raised through alternative finance platforms in 2015 as the equity crowdfunding market is set for spectacular growth across Europe since platforms appear to have gained investors’ trust and are building a sound reputation.
However, a number of potential risks, the study points out, are associated with the development of the industry.
Oliver* met up with Ronald Kleverlaan, an advisor to the European Commission who founded CrowdfundingHub in 2016, to discuss about current challenges and future scenarios.
OLIVER*: Hi Ronald and thank you for joining us. First of all I would like to ask you what are the risks associated with equity crowdfunding for an entrepreneur?
RONALD: First of all I would like to phrase that Equity Crowdfunding is offering a lot of opportunities for entrepreneurs raising investment funding for their startup or scale-up. As with all investments rounds, the entrepreneur should understand the time it costs to raise external funding and the obligations after raising their investment. Especially with crowdfunding this is important, because the marketing potential of your fans and investors that can help you as entrepreneur, can also turn against you if you are not transparent and showing your investors what the status of your company is. Another risk I see in some equity campaigns is that the valuation of the company is not reflecting the “real” value of the company. This is interesting on the short term, but gives problems in another investment round with “real” investors who demand a fair valuation.
Equity Crowdfunding is offering a lot of opportunities for entrepreneurs raising investment funding for their startup or scale-up.
O*: And for an investor?
R: It is important to know the company well you are investing in. Equity financing is high-risk investment. You should make sure you understand the financials, the company you are investing in and the team. Make sure you understand the risks involved in investing in startups and spread your investment.
Equity financing is high-risk investment.
O*: What is the role equity crowdfunding platforms have in lowering those risks?
R: They provide standard investment sheets for investors and entrepreneurs to understand the risks better and reduce the costs for the deal. Depending on their model, they also negotiate with the entrepreneur the valuation of the company or at least discuss with them a fair value. After an investment round the platform will act as representative for all investors, demanding regular updates from the entrepreneurs.
O*: What is the role the regulator can play in such a context?
R: With providing clear regulations on equity crowdfunding, they show the investment industry and retail investors this is a valid way of investing. By providing clear rules regarding maximum amount of investment per deal, they also promote spreading the investment over enough individual companies.
Clear regulations on equity crowdfunding show this is a valid way of investing.
O*: Another key topic which clearly emerges from your research is the one about the concerns around Brexit. Equity crowdfunding as well as alternative finance more in general is, to an extent, a kind of “born-global” business. However, experts are worrying about the possibility for Brexit to negatively affect the development of both the British and the European markets. For example, some argue that if British companies can now easily export their models under the “passporting” regulations, there are no guarantees that this agreement as well as similar ones will survive the negotiations. What’s your point on this?
R: I am no expert on Brexit, but if the UK will not have access to the European Internal market, they will not be able to passport their FCA regulations into the rest of Europe. Personally, I don’t expect that this will to much of a burden for the large UK platforms. They are currently not using the passporting opportunity a lot and they can open a new branch in one of the European member states and start passporting from there.
O*: What future do you see for equity crowdfunding?