The Crowdfunding Market in Europe: What Changes Await the Market in 2022-23?
Crowdfunding is a relatively new method of raising money. It can be an effective and efficient form of financing for non-profit projects, fintech startups, and various businesses. More attention is shifting to this form of fundraising: national and regional governments are working to develop their crowdfunding markets, expand their economies and promote the growth of small and medium-sized enterprises.
Experts predict that the size of the global crowdfunding market will increase at a 15% compound annual growth rate (CAGR) and become worth $196 billion by 2025. While the North American crowdfunding market aims to get the lion’s share of this sum, the European market also stands a chance following recent developments that have opened up new doors for its expansion.
In this article, we describe the current state of the European market for crowdfunding and discuss some related trends that might be of some benefit to you and your business.
What is Crowdfunding?
Crowdfunding is a way of raising money to finance a project through a collective effort. It usually involves using an online service that has a dedicated payment gateway to ask a large number of individuals to contribute a small amount of money towards a project or startup. This type of financing is popular in different parts of the world.
Anyone can use crowdfunding to finance their for-profit or not-for-profit projects, including freelancers, digital nomads, and even refugees. However, to begin, there are different types of crowdfunding that you need to know and understand so that you can use the right one for your initiative. The popular models are donation-based, investment-based, lending-based, and reward-based crowdfunding. You can learn more about them in our post on crowdfunding payment gateway solutions.
Popular services in the crowdfunding market
The crowdfunding market makes it possible for fundraisers and project owners to find donors and investors. It promotes the use of online fundraising platforms like Kickstarter, GoFundMe, Goji, LenderKit, Indiegogo, SeedInvest, Mightycause, StartEngine, Patreon, and Lemonway. Other notable payment solutions for crowdfunding include Stripe, Tomorrow, and MANGOPAY.
Does Europe need crowdfunding?
Through crowdfunding, project owners in Europe, America, Africa, Asia, and different parts of the world have more control over their initiatives, and financial risk is shared among so many people. However, there are also some disadvantages, such as a high cost of capital, irregular instances of "herd mentality," which can deprive potentially more worthwhile projects of sufficient financing. Besides, donors and investors also face various risks that can be related to fraud or the incompetence of the project owners. Nonetheless, if properly managed, crowdfunding is a great financing option.
What is the State of the European Crowdfunding Market?
Crowdfunding has the potential to grow faster than it does throughout Europe. The European Commission believes that it can be a key source of financing for all kinds of small and medium-sized enterprises in the long term. In 2017, there were 597 platforms for crowdfunding in Europe. The market turnover was $10.4 billion. The following year, the size of the market grew to 794, with a turnover of $18 billion.
Most of the crowdfunding platforms in the region are in the larger Western European countries. The major player was the United Kingdom, which had 89 platforms. The others that followed included Germany (63), Italy (51), France (51), the Netherlands (45), and Spain (39). Most of these crowdfunding platforms are home-based, whereas in the southern and eastern parts of Europe, there were fewer than ten platforms, with the majority of them being foreign-based.
According to experts, factors like population size, entrepreneurship rates, and the presence of traditional financial institutions together accounted for why some European economies had more crowdfunding platforms than others. For example, countries that were more populated had larger market sizes than their counterparts that were underpopulated. The populated regions had more fundraisers and donors, thereby encouraging the growth of crowdfunding platforms.
Another reason why crowdfunding is booming in Europe is that small and medium-sized enterprise (SMEs) lack financing. Despite the fact that the European Commission recently introduced several initiatives like subsidies and warranties and regulations to enable financial institutions to support SMBs, the list of small businesses eligible to benefit from them is not all-inclusive. The situation leaves them with no other choice but to depend on traditional banks, neobanks, electronic money institutions (EMIs), non-banking lenders, and crowdfunding services for the financing that they need to grow.
Today, crowdfunding is a standard practice in various industries, including real estate, conventional commercial loan markets, and startup financing sectors. For many walks of life, there are an increasing number of crowdfunding sites. Moreover, new crowdfunding legislation in Europe has made it safer for more individuals to support and invest in enterprises with relatively small sums of money.
In terms of crowdfunding market growth, in Europe, between 2021 and 2026, the crowdlending market is expected to reach $10.49 million at a CAGR of 2.65%, while the crowd-investing market is predicted to reach $3.52 million at a CAGR of 6.8%. The rate is lower for investing because various sectors are yet to recover from the adverse effects of lockdowns during the COVID-19 pandemic. An example is the reduced level of investment in the expansion of businesses and other related projects, which further led to low demand for loans and external funding. Nevertheless, the growth of digital platforms following the pandemic also aided the expansion of crowdfunding generally.
Cross-border Scope of European Crowdfunding Flows
More than 70% of the crowdfunding market in Europe is made up of foreign inflows to local platforms, while the rest is home to more domestic platforms. The highest level of cross-border financing flows was recorded in the Commonwealth of International States (CIS) countries, Eastern European countries, Georgia, and the Baltic states (Estonia, Latvia, and Lithuania) in 2017. A mid-range level of international funding was seen in the Southeastern European countries, Ireland, Iberia, the Benelux countries, and Central European countries. The relatively low cross-border crowdfunding levels were recorded in Germany, France, and the Nordic countries (Norway, Sweden, Denmark, Finland, Iceland, Greenland, Aland, and the Faroe Islands).
Institutional Investors in the European Crowdfunding Market
The composition of the European crowdfunding market includes institutional investors from financial markets for personal loans, credit cards, asset management, and pension funds. The majority of them are in Italy, where there are about 90% of institutional investors in the crowdfunding market. Other noteworthy economies are the Benelux region (88%) and Germany (64%). There are a few of them in the Commonwealth of Independent States (2%), as well as in Eastern and Baltic European countries (5%).
Recent developments: competition, partnerships, and major players
The European crowdfunding market is not so competitive. That is because a large share of the market has been dominated by a few companies. They retain their market share by going into partnerships with other fintech companies and creating innovative services. For example, in 2021, Funding Circle entered into a £300 million partnership with Atom bank to provide funding for more than 4,000 SMEs in the United Kingdom. Also, Zopa partnered with CreditLadder to help renters obtain Zopa loans and improve their credit scores.
In terms of competitors, there are a few major players in the European crowdfunding market. They are Funding Circle Holdings PLC, Zopa Limited, International Personal Finance PLC, LendInvest Limited, and Crowdcube.
European Crowdfunding Market: Unified or Fragmented Regulations?
Regulation plays an important role in the development of any market. It entails the formulation and implementation of appropriate rules, measures, and standards to ensure the protection of the interests of all players. When unified, several processes and systems are enhanced to enable service providers and users to transact safely and orderly. But the differences in regulations for e-commerce platforms and crowdfunding in different parts of the world have limited the development of economies through cross-border fundraising.
In Europe, there have been noteworthy fragmentations or disparities in the regulation of the crowdfunding market. While most concerns have been about investment crowdfunding, the least regulated types of crowdfunding services are those that do not require investments, which are reward-based and donation-based platforms.
Generally, platforms for reward-based and donation-based crowdfunding must abide by international regulations and standards for digital payments. Hence, they collaborate with local payment service providers and EMIs to ensure regulatory compliance with European legislation. For instance, while the collection of financial contributions requires specific authorization in Denmark and Finland, there are more lenient rules in the majority of other European markets.
Furthermore, US-based crowdfunding services like Kickstarter, GoFundMe, Indiegogo, and GlobalGiving use different approaches to sustain their market dominance. For instance, they translate their websites into the languages of the European countries where they operate. Thus, they localised the user experience while maintaining their unique global brands. Nevertheless, as reward-based crowdfunding platforms, they must comply with certain EU regulatory frameworks, such as the e-Commerce Directive, and the Consumer Rights Directive, to operate legally in Europe.
How the State of Crowdfunding Regulation in the EU Affects You
Everyone interested in the crowdfunding market in Europe should be concerned about the current state of regulations. For businesses, operating across borders has not been easy due to the lack of uniform laws and the disparity in licensing requirements across the European Union. The situation has made the cost of operations and compliance expensive and limited the scalability of various crowdfunding platforms. Besides, it has also narrowed the funding options available to startups. On the other hand, donors and investors have had to cope with a limited supply of platforms for crowdfunding amidst inadequate regulation.
Comparing Crowdfunding Regulation in Europe, the UK, and the USA?
The European Union is a latecomer to the business of crowdfunding regulation when compared to the United States of America. In 2012, President Obama used the Jumpstart Our Business Startups Act (JOBS Act) to create a legal foundation for the revolution of options for financing. His government used the Act to simplify how startups and small businesses obtain financing. The restriction on accredited investors and the ban on marketing by private companies were lifted. Hence, the process of raising capital became easy. Total assets reached more than $50 billion as the number of investors grew rapidly from 3.4 million to over 200 million.
In the United Kingdom, crowdfunding is not fully regulated. While investment-based and loan-based crowdfunding are regulated by the Financial Conduct Authority (FCA), reward-based and donation-based crowdfunding are unregulated. However, there is the UK Crowdfunding Association (UKCFA), which has its own code of conduct for protecting investors and operating as a self-regulated trade organisation. It was established in 2013.
Compared to the other regions discussed above, the European Union created a body for the evaluation of the potentials and risks of the crowdfunding market in Europe in 2014. It was called the European Crowdfunding Stakeholder Forum (ECSF) and was charged with the responsibility of studying the regulations in overseas countries, especially the United States, to make some applicable recommendations.
The Latest EU-wide Crowdfunding Regulation
After two years of intense discussions on how to harmonise crowdfunding regulation in the whole of Europe, the European Union implemented its new regulatory framework on November 10, 2021. It is known as the EU Regulation on European Crowdfunding Service Providers (the ECSPR) (EU Regulation 2020/1053 of July 16, 2020). By establishing a harmonised set of guidelines, the new Regulation creates an equal playing field for crowdfunding platforms in the EU and seeks to address the existing inconsistencies in national frameworks. This will allow European crowdfunding service providers (CSPs) to fully utilise the potential of having a unified EU market for crowdfunding.
The United Kingdom has the best crowdfunding results in Europe thanks to the UK Crowdfunding Association and the Financial Conduct Authority, which set the standards and regulations that promote the growth of the market.
Most of the crowdfunding platforms are in the United States of America. There are about 2000 crowdfunding service providers in the world, and more than 1,400 of them are in the United States.
The most popular crowdfunding site is Kickstarter. Other popular ones are Indiegogo, SeedInvest, and GoFundMe.
The globally accepted platform for crowdfunding is Kickstarter. It supports many countries, including the United States, the United Kingdom, Australia, Austria, Canada, Belgium, Germany, Greece, France, Hong Kong, Japan, Italy, Poland, and Singapore.
The best platform for startups varies depending on the type of business. However, most startups find SeedInvest more attractive. Besides, it is meant for growth-based startups.
Yes, crowdfunding can be a good way to finance your project or startup. It gives you access to a very large number of potential donors and investors.
The crowdfunding platform is large but still growing in different parts of the world. While there are currently about 2,000 platforms for crowdfunding, there is much more space for newcomers.
The Bottom Line
For a long time, the crowdfunding market in Europe lagged behind that in the United States for several reasons, which we have highlighted in this article. We cannot emphasise enough how important the lack of unified regulation for the conduct of this type of financing across the continent was to the market's growth. However, the implementation of the 2020 EU Regulation on European Crowdfunding Service Providers in November 2021 brings a lot of hope. Financial experts expect the market to grow very fast soon. That is because more donors and investors can now safely spend small amounts of their money on contributing to the financing of businesses and several projects through crowdfunding.
Concerning the future of the crowdfunding market in Europe, expert opinion has it that there will be more crowdfunding platforms providing varied services soon. Nevertheless, not every investor will find it suitable for their style of investment, especially those that prefer traditional services to modern, tech-savvy digital platforms for fundraising.
Lastly, since consolidation is a common development in expanding markets, the European crowdfunding market will see more of it in the future. Bigger platforms will acquire smaller ones or merge with themselves to deliver more services to investors and donors.