Published on Jan 24, 2023 11:44:22 AM
Written by Max Crowdfund
Expert opinion piece by Max Crowdfund CEO Felix Berkhout
This is a historical moment for my industry.
Over the last couple of years, war, disease and political agitation have rocked the world and technological leaps have reshaped it. The crowdfunding industry has not escaped the influence of these events - although, whilst many industries have been negatively affected by phenomena such as the COVID pandemic, some European countries have seen an increase in crowdfunding market volume. The growth of Artificial Intelligence, Blockchain adoption, machine learning technologies and regulatory improvements have further added to the growth wave impacting this industry.
Technological and regulatory advances are at a critical point that will likely explode the crowdfunding market, but also cull the weak from the herd. With the implementation of the ECSP licence and the growing trend towards renewable energy projects, 2023 is going to be a pivotal year for the European Crowdfunding industry.
This article represents my views (1) on how the European crowdfunding ecosystem currently stands and how I anticipate it will develop in 2023. I will discuss the crowdfunding market in general, the European real estate crowdfunding market specifically, as well as factors - in particular technological and regulatory factors - that I expect to affect my industry over the coming year.
The first online crowdfunded project is widely accepted to have occurred in 1997, when the band Marillion financed a rock music tour from the crowd (2). Over time, artists, individuals and business enterprises in Europe sought out new ways of obtaining finance in place of more traditional institutional lending.
The European online alternative finance market, specifically, tripled between 2015 and 2018, and in 2018 the total alternative finance market in Europe reached €15.3 billion (3) generated from about 630 operating crowdfunding platforms and contributing a total volume of €6.5 billion to the Crowdfunding market. According to Crunchbase listings, there are now over 800 crowdfunding companies with headquarters in Europe.
Despite the negative impacts of the global pandemic in 2020, many European countries have seen an increase in crowdfunding market volume. Two leaders of the Europe crowdfunding market - Germany and France - have collected approximately €1.26 billion and €1.02 billion respectively. Other countries, including Italy, the Netherlands and Norway, have also seen good crowdfunding market performance (4).
After several years of research, development and planning, Max Crowdfund was launched in 2020, and was expecting the COVID pandemic to slow its debut. Despite there being no concrete pre-pandemic frame of reference for the platform, we were none-the-less surprised when over 10 million euros were raised on Max Crowdfund by the end of 2021 and a further 30 million were raised in 2022.
Industry data for the European crowdfunding market reflects a record year in 2021 for equity crowdfunding, with more than double the amount invested in 2020 (5). In 2021, debt-based crowdfunding led the market, accounting for more than 60.0% of the global revenue (6).
Crowdfunding has quickly become a standard practice in many industries including the arts, commercial loan markets, litigation, startup financing and real estate (7). Real estate crowdfunding is a subcategory of equity-based crowdfunding in some European countries, and a sub-category of debt-based crowdfunding in others. In Germany, for example, it has been the leading segment of equity-based crowdfunding over the past three years, topping €381.8 million raised in 2019.
In 2020, many European countries experienced an increase in real estate crowdfunding. For example, the real estate crowdfunding volume in France had increased by 35% and in a whopping 185% in Italy (8). In 2021, debt-based crowdfunding led the market, accounting for more than 60.0% of global revenues (9). One of the main factors currently driving the development of the market is the recently approved EU crowdfunding regulation, which has also encouraged a wave of platform consolidation (10).
“Real estate is leading the pack in niche-specific crowdfunding” says a report by Crowdspace (11). The report included 455 crowdfunding platforms presented at CrowdSpace and was the major niche in its 2022 research sample. Of the 455 companies who participated in the study, 32% stated that they offer property investment opportunities (12).
Debt-based crowdfunding, particularly in the real estate sector, allows companies to access funds without navigating through the complicated procedures of conventional banking. Moreover, debt-based crowdfunding provides investors with better interest rates for funding projects in regular monthly instalments. Such factors have been driving the growth of the segment over the past years (13) and I believe will continue to do so.
In 2021, 90% of funds raised in the Netherlands were destined for companies, the majority of which was intended for real estate financing. Approximately 90% of the funds raised for real estate projects were in loan form. 2021 also saw some consolidation in the market with fewer crowdfunding platforms being launched, smaller platforms shrinking and larger platforms growing (14).
Dutch crowdfunding platforms are increasingly diversifying, with projects such as Solar Panel Sharing and mediation of bank financing emerging onto the scene.
NLInvesteert led the Dutch market in crowdfunding raising over 125M and Kickstarter was the market leader for rewards-based crowdfunding in the Netherlands last year. Platforms that have funded more than twice as much in 2021 as they raised earlier in a year included Max Crowdfund (15), who also won the CashCow award for best crowdfunding platform in the Netherlands 2022 (16)
Whilst some US based crowdfunding platforms such as Kickstarter, GoFundMe and Indiegogo have managed to sidestep some regulatory issues in order to sustain their market dominance, through tactics such as translating their websites into the languages of the European countries where they operate, Europe has seen more fragmentation within the regulation of the crowdfunding market (17).
Historically, crowdfunding activities in Europe have been regulated by local authorities with differing guidelines from country to country. As a result, crowdfunding platforms have been restricted from marketing investment opportunities to investors outside their country of registration (18) even though more than 70% of the crowdfunding market in Europe is made up of foreign inflows to local platforms (19).
A massive impact was made on the European crowdfunding industry when the EU published crowdfunding regulation, ECSP, on 10th November 2021, following a long process for the crowdfunding community which required numerous consultations with ESMA and existing crowdfunding platforms (20).
Whilst Max Crowdfund raised 3 times more in 2022 than in 2021 (21), crowdfunding volumes across the Netherlands almost doubled from approximately €400 million in 2020 to €700 million in 2021 (22). In 2021, the amount raised for creative projects such as film or musical projects increased by 10% to €12.7 million (23). The amounts raised via crowdfunded social projects in the Netherlands increased by almost 30%, to €30.9 million (24) and more than €30 million were raised through the sale of shares - four times as much as in 2020.
Crowdfunding in Europe is undeniably successful, establishing itself despite the impact of COVID-19 and other global events. However, the significant challenge of cross-border crowdfunding remains an important barrier to growth. The ECSP therefore marks the beginning of the next wave of improvements in the European crowdfunding ecosystem.
Historically, in reward-based crowdfunding, the “Directive on electronic commerce” (2000/31/EC) and subsequent regulations were the accepted framework for selling and purchasing goods on digital platforms. For Equity and Lending based crowdfunding, the “Markets in Financial Instrument Directive II” (2014/65/EU) was largely used, but it became clear that these rules were not sufficient to create a harmonised regulatory framework across Europe (25). Member states were eager to universalise the requirements for European crowdfunding platforms, a natural move for an environment with a single market.
Seven years later, on 10 November 2021, the “Regulation on European crowdfunding service providers for business” (ECSP/2020/1503/EU) entered into application in the European Union. The initiative was part of the European Commission’s FinTech action plan and the CMU action plan (26). The regulation homogenises crowdfunding rules across the EU for the provision of both equity-based and lending-based crowdfunding services. It includes the ability to offer crowdfunding services from any EU Home State into all other 26 EU markets with a single authorisation and without the need to apply for an EU passport.
The regulation requirements are very much focused on the platforms. Crowdfunding platforms must register in their national jurisdictions and be supervised by regional agencies such as the Central Banks or the Securities Markets Offices (27). They also have to provide detailed information about their business procedures, ownership structures, marketing activities and fraud prevention strategies (28). In the case of Max Crowdfund, as a regulated entity, this is not a big shift from what is already being provided to the Dutch financial authorities (AFM) and does not massively impact our activities, but presents distinct advantages.
In the sub-category of lending-based crowdfunding, for the first time in many member states, loans can be intermediated without a banking license (29). Crowdfunding platforms are also now allowed to manage a portfolio of loans on behalf of investors, a feature that is growing in popularity. Essentially, the investor specifies their risk tolerance and then the platform matches it to a suitable product, thereby providing them with an auto-bidding and auto-investing feature (30).
The burden on the issuers, i.e. the companies seeking funds, is comparatively low, which is an advantage to developers. Issuers have to provide a six-page key investment information sheet, which includes a summary of the planned business activities and investment opportunities presented to the investors (31). Again, this is not a far cry from the information that is already requested by Max Crowdfund in order to publish a project on the platform.
For investors, there are no particular restrictions that come with the new regulation. They can invest unlimited amounts as long as they qualify as sophisticated investors, and otherwise it is the platform that has to ensure that retail investors are aware of the risks of crowdfunding (32). Thereby retail investors benefit from an aligned and enhanced investor protection framework introduced by the regulation.
Many member States have been slow to introduce the rules into national law. In response, the European Commission extended a transition period for previously under national law regulated crowdfunding platforms from the 10th November 2022 initially to 10 November 2023, delaying the full impact of reform by one year (33). For Max Crowdfund, adoption has been perhaps easier than for other platforms due to the existing regulatory requirements imposed by the AFM.
In a survey conducted by Crowdspace, only 17% of participating platforms claimed to have implemented the necessary changes for the ECSP license. 43% of platforms were underway with the implementation, and 19% were not preparing at all (34).
Since crowdfunding platforms are technically Fintechs, their underlying software and technology play a crucial role in the industry's future. Technological developments from cybersecurity to AI, to data-driven marketing (35) all play a key role in the future of the sector. Auto-investing was the most popular feature among Crowdspace survey respondents in 2020, and 18% of the platforms surveyed in 2022 had already implemented it (36).
According to the aforementioned survey by Crowdspace, a Fintech business becomes more sustainable and able to respond quickly to emerging challenges when it owns its own technology. 84% of respondents said that they own the intellectual property rights of their crowdfunding software (37).
Secondary market and referral systems are the other most popular emerging features offered by 16% of platforms. Among other features to be launched by the platforms surveyed are mobile apps, blockchain, gamification, referral systems, blockchain, and open banking (38). Respondents also mentioned cryptocurrency support, adding IBAN and virtual cards as payment methods, and expanded business auto-lend settings (39).
The global crowdfunding market is expected to grow at a compound annual growth rate of 16.2% from 2022 to 2030 to reach USD 5.53 billion by 2030 (40) according to crowdfunding analysis reports. Banks are showing no signs of relaxing procedures nor improving interest rates, thus real estate debt-based crowdfunding should continue to grow. The rising demand for debt-based crowdfunding is also driving the segment growth as startup companies seek to raise funds quickly in comparison to traditional venture capital methods. The need for crowdfunding solutions is increasing, and will continue to increase, because they have proven to be adaptable, scalable and effective methods of raising money (41).
North America dominated the crowdfunding market and accounted for more than a 29.0% share of the global revenue in 2021 (42). I believe that with the adoption of ECSP regulation, Europe will finally have a framework to compete with the US market, although Asia Pacific is predicted to emerge as the fastest-growing regional market over the forecast period (43).
Regulation plays an important role in the development of any market, and European crowdfunding is no different. The ECSP regulation is well-balanced between enabling market growth and maintaining consumer protection (44). It will undoubtedly enhance safety and order in the industry whilst facilitating cross-border investment. However, the practicality of the regulation will depend on ECSP adoption across the European member states. The consultation of the clarification articles of ESMA and EBA have shown that some of the provisions can only be managed by the larger European platforms (45).
My prediction is that, overall, the ECSP will boost market volumes across Europe but will also necessitate platform collaborations across the Member States. Smaller platforms will struggle with the stipulations of the new rules as regulatory compliance will intensify the need for operational scalability, eventually thinning out some of the smaller platforms, or forcing them to merge with others.
The crowdfunding market has already entered into a phase of consolidation and higher competition between platform service providers. According to Dealogic, in 2021 there were 12 acquisitions announced in Europe of crowdfunding-related services. This compares with between 7-5 in the previous four years.
For equity-based crowdfunding, I believe securities will become the instruments of choice following the adoption of the ECSP: These financial instruments are well-standardised across Europe, which will most likely aid the confidence of investors. Even though the ECSP still does not allow for Initial Coin Offerings (ICOs), it is open to tokenised securities, which can be traded on blockchain, thereby the ECSP may arguably boost the emerging sector of blockchain-based finance (46).
Another expected development in the market is the adoption of renewables and sustainable businesses, particularly green and renewable energy. In 2022, sustainability and green energy offerings were hosted by 22% of the platforms surveyed in the Crowdspace report, 12% of surveyed platforms focused on green and renewable energy and 45 crowdfunding platforms represented on CrowdSpace offer to invest in green energy Campaigns (47).
Investors are increasingly using non-financial ESG factors to identify investment risk and growth opportunities. More widespread among HNW, sophisticated and professional investors, some everyday investors are none-the-less inclined towards impact investing. Besides sustainable investment opportunities, crowdfunding platforms themselves are taking steps towards implementing ESG policies on a company level. 59% of Crowdspace platform respondents have implemented ESG reporting processes (48).
Given the present energy crisis in Europe, the sector has identified the need to engage with as many alternative energy resources as possible. I believe it is highly likely that more crowdfunding projects and platforms dedicated to renewable sources will emerge in 2023. While high budget energy projects generally require heavy government backed funding, sustainable energy initiatives can be supported by climate conscious investors, making crowdfunding a great fit. Max Crowdfund is currently pursuing the option of financing solar panel projects on the platform, subject to ECSP approval, and is in discussions with some major green energy companies in the Netherlands. I believe this could be a major investment category in 2023 for our platform, and others across Europe.
Sources (footnotes)
1 This article is an opinion piece based on research and should by no means be interpreted as investment advice or taken as fact. All third party sources have been referenced and I am not responsible for their accuracy.
2 https://www.statista.com/topics/3372/crowdfunding-in-europe/#topicOverview
3 2020 Cambridge Centre for Alternative Finance (CCAF) Alternative Finance Benchmarking Report
4 https://www.crowdfundinghub.eu/current-state-of-crowdfunding-in-europe-2021/
5 Capital Markets Union Key Performance Indicators – Fifth Edition European Capital Markets: Five years tracking the development of CMU – how much progress has been made? November 2022
6 https://www.grandviewresearch.com/industry-analysis/crowdfunding-market-report
7 https://askwallet.io/blogs/crowdfunding-market-in-europe
8 https://www.crowdfundinghub.eu/current-state-of-crowdfunding-in-europe-2021/
9 https://www.grandviewresearch.com/industry-analysis/crowdfunding-market-report
10 Capital Markets Union Key Performance Indicators – Fifth Edition European Capital Markets: Five years tracking the development of CMU – how much progress has been made? November 2022
11,12 Crowdfunding industry report MAJOR REGULATORY, MARKETING AND TECH CHALLENGES 2022 By Crowdspace
13 https://www.grandviewresearch.com/industry-analysis/crowdfunding-market-report
14,15 https://www.crowdfundingcijfers.nl/crowdfunding-in-nederland-2021/
16 https://www.cashcow.nl/awards/
17 https://askwallet.io/blogs/crowdfunding-market-in-europe
18 Crowdfunding industry report MAJOR REGULATORY, MARKETINGAND TECH CHALLENGES 2022, Crowdspace
19 https://askwallet.io/blogs/crowdfunding-market-in-europe
20 Source: Crowdfunding industry report MAJOR REGULATORY, MARKETING AND TECH CHALLENGES 2022 By Crowdspace
21 maxcrowdfund.com
22-24 https://www.crowdfundingcijfers.nl/crowdfunding-in-nederland-2021/
25-33 Crowdfunding Hub Current State of Crowdfunding in Europe July 2021
34- 39 Crowdfunding industry report MAJOR REGULATORY, MARKETINGAND TECH CHALLENGES 2022 By Crowdspace
40-43 https://www.grandviewresearch.com/industry-analysis/crowdfunding-market-report
44-46 Crowdfunding Hub Current State of Crowdfunding in Europe July 2021
47, 48 Crowdfunding industry report MAJOR REGULATORY, MARKETING AND TECH CHALLENGES 2022 By Crowdspace
