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    Posted March 7, 2014 by
    MarkEsposito
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    Crowdfunding in Europe: Will we stop depending on banks?

     

    By Terence Tse and Mark Esposito*

     

    Let’s start with an important fact: according to the European Commission, Europe has 20 million small- medium-sized enterprises (SME) with a turnover of less than €50m or fewer than 251 employees. In 2012, they employed 90 million people, representing over two-thirds of all Europe’s jobs. In addition, they produced nearly 60 per cent of the region’s non-financial private sector output. One would therefore imagine that ascertaining their economic survival is an important goal. Yet, these companies are finding it increasingly difficult to seek the financing that they need to do so.

     

    There are no shortage of advocates –- including the latest World Economic Forum report presented in Davos 2014 that we contributed to –- suggesting the different ways to promote entrepreneurship in Europe. As much as we try to encourage SMEs to thrive, this would most likely have minimal impact as long as these companies would have to rely on banks for external funding and the data published by the European Commission in 2012, speaks of an abundant 80% of all access to capital, still delivered by banks.

     

    This is the reason why, over the past two decades, the EU government has been pushing hard for more funding alternatives such as venture capital and a more active equity market. With that in mind, the EU Parliament sees crowdfunding as a potentially promising funding alternative.

     

    Crowdfunding can be defined as a collective effort of many individuals who network and pool their resources to support efforts initiated by other people or organizations. This is usually done via or with the help of the Internet. Individual projects and businesses are financed with small contributions to from a large number of individuals, allowing innovators, entrepreneurs and business owners to utilise their social networks to raise capital.

     

    A relatively new – and therefore relatively unknown – industry, crowdfunding actually comes in different forms including:

     

    • Donation-based

    • Peer-to-peer

    • Peer-to-business

    • Invoice trading

    • Equity-based

     

    In 2011, it has been estimated that more than €300 million was raised in Europe across all types of crowdfunding, representing one-third of the world market.

     

    The EU views equity crowdfunding to be a potentially new form of financing for its SMEs because it allows early stage businesses to sell shares to investors. This is important if the goal of creating more innovation-based companies as described in the Europe 2020 plan is to be achieved. While the intention to build this up is in the first programmatic reports of the EU, the fiscal and regulatory frameworks that will ease the access to crowdfunding platforms is still being discussed, with several hurdles to address, still largely unsolved.

     

    Across Europe, these particular types of crowdfunding, whilst small in size for the moment, have been growing at substantial speed. For instance, Germany’s market in 2013 is €15 million and UK’s is £28 million. Yet, their growth rates – albeit from a low base – were 348% and 371%, respectively.

     

     

    The efforts to initiate a shift from banks to diversified options is in progress, but the EU must initiate a process of reforms to adapt the legal frameworks to integrate crowdfunding as a viable alternative to banks. This is even more important as we want to move away from dependency from banks and provide some oxygen to SME. The window of opportunity is now. Will the fatigued EU realize about it?

     

     

    *www.terencetse.com & www.mark-esposito.com

     

     

     

    Sources:

     

    Kristof De Buysere, Oliver Gajda, Ronald Kleverlaan, Dan Marom, “A Framework for European Crsowdfunding”, http://evpa.eu.com/wp-content/uploads/2010/11/European_Crowdfunding_Framework_Oct_2012.pdf, accessed on 24th February 2014

     

     

    These data is drawn from the a report produced for a discussion with the European Commission on 18th February 2014 by ESCP Europe Business School (Andrea Acerbi, Jean-Francois Culot, Joseph Hermet, Yan Ma and Hugo Palmer).

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