Despite the fact that peer to business lending and all types of crowdlending / crowdfunding are niche products dwarfed by mainstream banking, last year Europe raised €300 million through various types of crowd funding – which adds up to about a third of the world market. As at the end of 2011, 200 crowdfunding platforms were open for business throughout Europe and their number is forecast to grow by 50% by the end of 2012.
At least, that’s according to the report, A Framework for European Crowdfunding.
Before we get any further, I should make clear that the report covers the various different types of crowd funding / crowdlending including debt based funding typically associated with peer to business lending – available in the UK via FundingKnight, Funding Circle and Thin Cats.
Infact, the report manages to list 12 different types of crowd funding, which it in turn groups into four basic types:
Donation – A contribution made without tangible reward
Reward – A purchase contract for a product or service
Lending – a credit contract or loan where credit is repaid plus interest and fees
Equity – Shareholding contracts, shares, equity-like instruments or revenue sharing in the project/business, potential up-side at exit
According to Matthias Klaes, professor of commerce at Keele university and the author of the report’s foreword, these vairations on a them are linked by a common thread:
“Crowdfunding may take many forms. But it is clear from their survey that we are witness to the rise of a new kind of investor, a new kind of entrepreneur, and a new kind of intermediary, who are all coming together in novel ways of channelling funds to innovative projects and SMEs.”
A three pronged plan of attack
The report calls for a three pronged approach to help oversee the future of crowdfunding in Europe:
First pillar = Regulation
“Crowdfunding intermediaries should establish criteria for all types of consumer protection, including security of information, financial control and transparency and fraud prevention.
Second pillar = Education
“For crowdfunding to flourish, we believe a pan-European educational forum is necessary to educate stakeholders, funders and entrepreneurs on the benefits of the industry and the different business models of crowd funding.”
Third pillar = Research
“The industry should drive academic and third part research…. Crowdfunding operators should should provide data sets to further industry research; the industry needs to find a transparent and open approach. Public reporting and research will drive competition and innovation within the industry.”
Why get involved in crowdfunding?
It also shares some interesting thoughts on what motivates people to start crowdfunding. As the digram bellows (reproduced from the report) shows, that motivation differs according to the type of crowdfunding model.
Whilst P2P Lending attracts people motivated by financial return and a more efficient way of lending and borrowing money, other types are more likely to have altruistic appeal.
Broadly, though, motivation (for lenders/investors) can be split into three:
Social return – Funders have an intrinsic motivation to help a particular project succeed.
Material return – Funders receive a product or service in return for their investment but pre-sales crowdfunding means that the investor pays the project in advance to create working capital to actually bring the product to market.
Financial return – A funder invests via a loan or equity based model and collects interest or dividend payments.
Whatever your motivation, the report makes a great introduction to crowdfunding in Europe, covering further categories such as policy discussion, European regulation and legislation and how to implement an operational framework for European crowdfunding.
You can download the full report, A Framework For European Crowdfunding here