(Investment Zen, CC BY)
On average, every day one or two companies are created based on the group financing. An absolute regional leader in crowdfunding is Slovenia, which took 80 per cent of all financial means, while Croatia lags behind with some 10 per cent. But, after the Zagreb Stock Exchange started a crowdfunding campaign, this way of financing ideas and projects gained much interest in Croatia.
As an alternative finance, crowdfunding is defined as the practice of funding a project or venture by raising many small amounts of money from a large number of people, typically via the internet. Generally, it involves the project initiator who proposes the idea to be funded, individuals or groups who support the idea, and a moderating organization (platform) that brings the parties together to launch the idea. In Croatia, these campaigns resulted in the amount of some USD10-15,000. In the last year alone, this barrier was crossed for 20-30 times more. Zagreb Stock Exchange started the crowdinvesting with the Funderbeam and opened the space for further developments in this kind of financing. It follows now good examples given by the neighboring Slovenia.
There are many risks involved in the crowdfunding. Lack of regulation, financial aspects of project and general liquidity of the market, lack of expertise and management skills by fundraisers, lack of investors’ understanding of the potential of the products and ideas, asymmetry of information, manipulation of credit scoring, inappropriate due diligence checks, new market players and many other questions pose serious key barriers for investors and for the EU regulative bodies themselves. It is still to be seen whether the EU will act in support of alternative finance in general, will it focus more on the research and innovation, or simply just innovation or just research. There is a clear need to address the underlying issues for crowdfunding in Europe as a whole.
The positive effects
In 2016, USD323,403 has been raised in Croatia. Out of 49 projects applied, 12 have managed to be funded by 6,163 investors. Indiegogo has been by far the most favorable platform and the biggest amount of financing has been given to the projects involving the high tech vitamin check, coffee making, festivals, a cooperative brewery on the Croatian coast. As it turns out, crowdfunding has been successful in creative work such as blogging and journalism, music, independent movie making, and funding the start-ups. Croatia and many other CSE countries should follow crowdfunding campaigns in the rest of the world, where this kind of alternative financing has been used in the sectors of food and agriculture, real estate, philanthropy, science, journalism, intellectual property exposure, and international development.
It is a good basis for other ways of fundraising, which makes capital more approachable and cheaper for entrepreneurs and citizens. A favorite way is crowdlending, i.e. group money lending. However, most of other kinds of crowdfunding are bounded by regulations and many simply cannot enjoy this kind of financing. Croatia and the Balkan region have enough financial means to support this scheme, as evidenced in the growth of crowdfunding. But, the regulations block people in taking money out of the banks, where the saving interest is around one per cent, and to earn more on crowdlending, make the way to the capital cheaper and easier. Group lending have up to seven times more volume than group financing using Kickstarter or Indiegog, i.e. the crowdfunding based on donations. Obviously, the crowdfunding is in its beginnings and the money raised is quite a small amount, but soon it may be European-wide decision to employ more serious crowdfunding.
European Union wants to promote crowdfunding
As it seems from the experience, the crowdfunding is more suitable for later stages of the innovation cycle, when the results are easier to anticipate and evaluate by the „crowd“. It also fits the innovation related to the improvement of life conditions such as energy, environment, food, health, as well as the less capital-intensive initiatives. Thus, the European Union decided to give a boost in crowdfunding, whose platforms should seek profitable business models, creating serious networks for crowd engagement, managing expectations of investors, everything with more transparent investments, crowd liquidity, and durable trust of investors.
The European Commission will cancel the non-refundable projects from the EU funds and replace them with adaptable credits and crowdfunding by 2020. The EC acknowledges the alternative finance as having an important role in helping to fund innovative companies in their early growth and scale-up phase, and although it grows fast, it is still small in Europe compared to other regions. The total value of the European alternative financing market was estimated between EUR4,2bn and EUR5,4bn in 2015.
Of course, EU cannot be compared to US markets or Asian ones, as it consists of specific countries where development of crowdfunding platforms correlates with the maturity of alternative finance market, as well as the availability of such funding, cultural readiness and the existence of support measures, and lack of impediments. The EC will almost certainly employ the cross-border regulation at the EU level and different regulatory regimes amongst countries. In many EU countries, such as Poland or Croatia, the crowdfunding is still a new phenomenon, but successes of many projects which gained financing this way are showing the users are very favorably inclined towards crowdfunding. In Croatia and in Poland, for instance, legislation impedes the development of crowdfunding but creates the open public debate, especially concerning the important questions such as benefits and risks associated with this concept.
Croatian, Slovenian and Polish examples show it is an especially good way to finance the small projects (e.g. up to PLN800,000). Most of the projects have the niche and non-mass character and organizing the fundraising is not the main aim; the goal is a promotion. Post-communist countries should change the mentality and logic of the market, research and innovation and other ways of forming the SMEs activities. It should also include the culture of sharing, but also the culture of giving.
Crowdfunding has a capacity to form new entrepreneurs and renew present ones who willingly share their profit to sustain the goals expected in a wider society, such as reduction of exclusion and its subsequent poverty, diffusion of the culture of giving and of communion, development of businesses and creation of new jobs, having business people who can conceive and live their activity as a vocation and service to the local community. The EC’s decision to cut down the non-refundable financing may be a direct sign for communities to think locally and mutually support the SMEs and innovation.
Vedran Obućina is an analyst and a journalist specializing in the Croatian and Middle East domestic and foreign affairs. He is the Secretary of the Society for Mediterranean Studies at the University of Rijeka and a Foreign Affairs Analyst at The Atlantic Post.