Online capital formation is one of the earliest sectors of Fintech. Platforms exist around the world to match investors with debt, equity and other securities to raise capital to finance a firm, back a real estate project, or simply to provide capital to those in need. So how is crowdfunding doing in the time of COVID? A report created by the CrowdfundingHub in Europe has created an interesting snapshot into the European crowdfunding industry.
Ronald Kleverlaan, Chairman of CrowdfundingHub, explains:
“When we published our first report on the Current State of Crowdfunding in Europe 5 years ago, we already predicted that this industry would not develop at the same speed in different parts of Europe. Based on our “Maturity Index”, we identified the different preconditions which are needed to develop a more mature industry. With the aim of re-identifying the current situation in Europe, we reached out to our international partners in the Altfinator Policy Network and worked together with our academic partners at the Cambridge Centre for Alternative Finance and the European Centre for Alternative Finance to provide in-depth insights on the Current State of Crowdfunding in Europe in 2020. I am really looking forward to the growth of the crowdfunding industry in the next 5 years and I am excited to see what the industry will have accomplished when we publish our report in 2025.”
The report, which is available for download here, focuses on the analysis of several representative European countries: France, Italy, Netherlands, Norway, Germany, as well as the UK. It also takes a look at six other European countries – Spain, Finland, Malta, Portugal, Hungary and Denmark.
The report says that in spite of the negative impacts caused by COVID, many European countries have seen an increase in crowdfunding market volume. The top countries of the European crowdfunding market – Germany and France – have collected approximately €1.26 billion and €1.02 billion respectively. Of note, this is inclusive of both donations (charity) and rewards (e-commerce) – so not just securities – debt, equity, etc.
It is important to note that currently, each country operates under a different set of regulations which obviously skews numbers in different directions depending on local rules.
Starting with France, lending (debt) based crowdfunding registered €741.9 million in 2020, a 46% increase versus 2019. In 2020, equity crowdfunding hit €59.2 million. French real estate crowdfunding saw a 35% increase since 2019, collecting €505 million in 2020.
In Germany, there are 78 equity-based crowdfunding platforms and 16 lending-based crowdfunding platforms that are based in Germany. These platforms tend to operate in other countries as well. Another 15 equity-based crowdfunding platforms, which are based in Austria, also operate in Germany.
The report states:
“The total collected amount in 2019 and in 2020 was €495.6 million and €412.4 million respectively, representing a decline of 16.8% in 2020. This decline can be explained by the cessation of the platform Funding Circle Germany, which stopped operating at the end of 2019. The decline in real estate crowdfunding can be ascribed to changes in the legislation for banks underwriting real estate loans in the first half of 2020, reducing the number of loans granted by banks to co-financed real estate crowdfunding projects.”
Regarding lending-based crowdfunding, the report estimates that Germany saw originations of around €800 million during the year.
Italy experienced a dramatic increase in equity crowdfunding with a 95% increase since 2019, reaching €122.5 million in 2020. Lending jumped by 75% to €179.5 million.
In comparison, the Netherlands crowdfunding market experienced a decline of 2% as compared to 2019, raising €417 million in total.
The report includes the United Kingdom and its post-Brexit activity. The UK is typically a standout in the Fintech industry and equity crowdfunding had a solid year in 2020 raising £332 million largely from the two dominant platforms, Crowdcube and Seedrs. For debt-based platforms, a volume of €5.1 billion was reported in 2020 – a decrease of 35.4%.
The impact of COVID is challenging to resolve across jurisdictions as each country had individual programs designed to backstop the economy. The authors of the report state:
“Many companies have had difficult moments during the global pandemic in 2020, however, we found out that the crowdfunding industry was very agile – it has swiftly implemented new business models and provided additional support and flexibility for the projects and companies that it supported. Despite the negative impacts caused by the global pandemic in 2020, many European countries have seen an increase in crowdfunding market volume. It is also worth noting that reward and donation-based crowdfunding experienced a huge increase during the COVID-19 crisis. Most of the donations were made to support those who were impacted by the pandemic. Thus, reward and donation-based crowdfunding is expected to continue its growth in the upcoming years.”
In November of 2020, new pan-European rules for European Crowdfunding Service Providers (ECSP) will commence that seek to harmonize the European crowdfunding market. Issuers will then be able to raise up to €5 million across all EU member states. While the regulatory details are still being hashed out, this should be a boon for the industry.
The authors believe that in the next 5 years, the ECSP regulation will not only encourage the development of crowdfunding in Europe, but will also ensure that crowdfunding is “a key component in the European Capital Market Union.”
“This will boost the collaboration between public authorities and crowdfunding platforms for match-funding models. It will also enable private and public funds, including European Structural Funds to be distributed through crowdfunding platforms.”
The report provides a worthwhile perspective into the evolution of online capital formation and foreshadows expectations for the future of crowdfunding. Perhaps the biggest risk to this sector of Fintech is regulatory hesitancy – always a wild card.