What began as a way for artists and musicians to fund their work has grown into a tool suitable for impact ventures. Crowdfunding typically attracts small investors to businesses that are (literally or metaphorically) close to their heart.
Take the local bar that raises funds for new outdoor seating made by local woodworkers, for example. The personal connection and engagement caters for transparency and accountability from the investor as well as the business owner.
That is why platforms exclusively serving impact companies already account for a fair share of the crowdfunding bubble. But the urge for impact is becoming more important even for investors on general crowdfunding platforms, according to Dutch CrowdAboutNow.
"When we first started our platform, a lot of businesses were raising funding for artisan crafts, such as local foods and beer microbrewing," said managing director Mark Laagewaard, who founded CrowdAboutNow ten years ago.
The crowdfunding platform recently surveyed what's most important to their investors. Ahead of financial profit comes having a positive social or environmental impact on the community.
This is the first time CrowdAboutNow conducts such a survey. But according to Laagewaard, new ventures and discussions with clients show that impact is getting all more important to crowdfunding investors in general.
"I believe that people (in Europe, ed) have become estranged from where their products come from and how they are produced. As a reaction, people want to know where they invest their money."
An increasing number of businesses have been using crowdfunding in the past few years. Last year's lockdowns put a halt to this development. In the Netherlands, 2,700 projects raised €290mn in 2020. This compares to 3,300 projects and €339mn in funding in 2019, according to datasite Crowdfundmarkt.nl. Up until now, real estate and sustainability have been the most attractive sectors for Dutch crowd investors.
With and without interest
Crowdfunding platforms can connect small business owners with venture capital for amounts as small as €25. Investments can be loans, pre-buys or depositary receipts. Entrepreneurs typically decide for themselves which interest rates and terms they offer investors.
Not all ventures are small-scale. Yesterday, a subsidiary of Dutch energy company Greenchoice announced a €15 mn crowdfunding campaign to build new solar energy parks. The facilities will provide clean energy for 80,000 households and offer crowdfunders bonds with a 5% interest rate, newswire ANP reported.
Other crowdfunding ventures present themselves as impact only. One example is the new Dutch crowdfunding platform PlusPlus, which connects investors with farmers and food businesses in developing countries.
"If you are really serious about impact, you want to do something for the rest of the world. That's why we want to take crowdfinance one step further – we don't offer any interest to lenders," said managing director Peter Heijen. Ten years ago he founded Lendahand, one of three organisations backing the new platform.
Similar no-interest crowdfunding platforms already exist, such as American Kiva. Business owners who make use of PlusPlus pay a one-time-fee, equivalent to 4-9% of the loan.
Heijen said that PlusPlus starts with investigating the impact of a potential crowdfunding project, instead of first looking at the company's financial situation. That is also where "additionality" comes into the picture, he said: "For example, can this farmer get a loan from a bank? If the answer is no, then we can serve the unserved."
This comes with risks for the investor, amplified by the nature of the unpredictable agriculture market. Just like with other crowdfunding platforms, there is no guarantee investors get their money back. Under certain conditions, a PlusPlus compensation fund can be triggered to cover up for 50% of the investment.
New European rules
Despite Covid, the global crowdfunding market is expected to grow by 16% from 2020 to 2025, newswire AP reported. As an example, CrowdAboutNow expects to fund 260 projects this year and 400 in 2022.
It is hard to put a number on how big the share of impact investments is within crowdfunding, and consequently how this share will develop. Newcomer PlusPlus expects to raise €1.1mn this year, and subsequently €20mn per year until 2025. The organisation also aims at opening up to investors in other European countries during this period.
The European Union is working on removing red tape for crowdfunders. The newly adopted Regulation on European Crowdfunding Service Providers (ECSP) is now being put in place to streamline the authorisation of crowdfunding platforms in all member states.
- The Regulation on European Crowdfunding Service Providers [ECSP] entered into force in November 2020
- AP press release on the Mordor Intelligence Global crowdfunding market outlook