Crowdfunding websites like Crowdcube and Kickstarter contributed more than €1 billion (£827 million) to the European economy in 2013, according to an estimate by the European Commission. With successful fundraising campaigns for high-profile consumer goods like the Pebble smartwatch, the Oculus Rift headset (recently sold to Facebook for $2 billion), and even campaigns in the online accounting software arena, the contribution of crowdfunding to the alternate finance landscape looks set to grow further still in 2014.
The report highlights the difficulty of regulating crowdfunding, as the industry can be subdivided into several different categories. Equity crowdfunding, which gives backers a stake in the company they support, rewards-based crowdfunding, which offers gifts and perks in exchange for cash, as well as straightforward pre-ordering of products, all have different rules and tax implications. Combine these different approaches with Europe’s diverse tax ecosystems and the issues becomes even more complex.
The report also estimates that 500,000 projects were financed through crowdfunding in 2012, a 65% increase on 2011. If such growth continues, crowdfunding could soon eclipse Venture Capital funding as the largest non-institutional business financing method in Europe. Venture Capital investments totalled €7 billion in 2012, while traditional bank lending remained the largest source of financing by an order of magnitude, totalling €6 trillion.
The report highlights the many virtues of crowdfunding:
“Crowdfunding has real potential to finance different types of projects, such as innovative, creative and cultural projects, or activities of social entrepreneurs, that have difficulties in accessing other forms of financing. SMEs can also benefit as crowdfunding can respond to the needs of many small start-ups that do not manage to access bank finance, venture capital or reach the stage of IPO.”
However the report concludes many dangers remain for potential crowdfunders, such as the risk of fraud, misleading advice by campaign promoters, and the lack of exit options for those who choose to invest in equity.
Photo by Yukiko Matsuoka