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The many shades of crowdfunding

Lasse

The word ‘crowdfunding’ is widely used to describe various types of fundraising, and the big picture can sometimes be confusing to understand. Therefore I thought it good to dissect the market a little bit and display the main categories of digital fundraising, or crowdfunding as its most nimble form is called.

The crowdfunding market can be divided into four main categories: securities, lending, rewards, and donations. Securities-based crowdfunding is the one where Invesdor works, so let’s start with defining it.

 

Securities-based crowdfunding

Securities-based crowdfunding disrupts traditional investment banking business, where companies can raise either equity or bond funding. Securities-based crowdfunding is the most complex form of crowdfunding and it is smaller in size than the lending-based category. All products in this category are financial securities and players in this category often need a broker/dealer license from their local financial authorities. In Invesdor’s case, we have a MiFID investment firm licence from the Finnish Financial Supervisory Authority.

Just like in investment banking, under the securities-based umbrella reside two subcategories: equity and bonds. Equity crowdfunding can still be split further into a couple different models, the main ones being the VC model and the investment banking model – but that’s something for my next blog post.

Within the investment and growth financing scene in the EU, the term crowdfunding is generally used to refer to types of fundraising that have three characteristics:

  1. Open call. I.e. the investment opportunity is posted online on a platform where it is open to everyone.
  2. Digital distribution. Supply and demand are matched by online platforms, such as Invesdor, as this makes the model scalable. Offline means such as telemarketing have no place in crowdfunding.
  3. Relatively small sums. Digital fundraising stops being crowdfunding when you hit a €1 million annual limit per company, at which point you move onto the big leagues, which in the EU means more regulation under the Markets in Financial Instruments Directive. Individual investments (€3,000 at Invesdor) are also relatively small compared to, say, corporate finance, where the investors are typically big funds.

To summarise within securities-based financing:

  • digital fundraising <€1m = crowdfunding
  • digital fundraising >€1m = MiFID investment activity

 

Other types of crowdfunding

Rewards- and donation-based crowdfunding are broad categories, which can include arts and culture funding, pre-order sales for companies and for example charity funding. Rewards- and donation-based models often go hand in hand, but they may also be split to two categories due to local legal frameworks. A typical project may be a local artist, who raises funding in order to produce a new music album. The backers can buy the album beforehand with reduced price, or they may just want to give few euros to support the artist. Also many growth companies have been using the rewards-based crowdfunding to generate pre-sales for a new gadget or a product.

Lending based crowdfunding (P2P or marketplace lending) is disrupting the traditional bank-lending business, where straight loans can be given to people and businesses in need of loans. There are many large platforms specialising in certain segments, such as SME companies or individuals. This category is the largest crowdfunding category in Europe, with some of the largest platforms having given out loans worth of billions of euros.

That’s it for now. As promised, my next text will cover the two main equity crowdfunding models, which ought to be interesting especially for the entrepreneurs out there.

 

 

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Tagged: Points of view, crowdfunding, digitalfundraising

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Lasse Mäkelä

Written by Lasse Mäkelä

An investment banker and CFO by experience, Lasse heads Invesdor as its CEO and co-founder.