As traditional sources of investment finance continue to remain scarce, will the movement towards crowd-funding prove to be the perfect solution for clean technology projects?
As the name implies, crowd-funding is a term used to describe any situation in which a large number of people get together, usually via the internet, to collectively fund the activities of other people or organisations.
The individual investments can be as little as 20 euros per person with the most likely beneficiaries being early stage businesses.
It’s not new as a concept, being pre-dated by charity-led ‘donation’ and ‘pledge’ systems, and by ‘micro-patronage’ networks often used for funding artistic and creative ventures.
Crowd-funding is a mechanism however, which has become increasingly popular over the last few years (some sources cite the first recorded use of the term ‘crowd funding’ as recently as 2006), a popularity which is mainly due to:
(1) the growth of strong social networks that incorporate secure online payment systems;
(2) the general scarcity, as a result of the current economic climate, of funding from traditional sources such as banks, investment funds, angel investors, and the like;
(3) the current lack, again as a result of the current economic climate, of attractive interest rates for small savers.
Crowd funding is proving to be a particularly useful funding mechanism for small business ventures, because it is able to take advantage of the natural synergy that exists between potential ‘crowd’ investors and start-up businesses that share their general goals and aspirations in a ‘life, the universe and everything’ sort of way.
Indeed, advocates of crowd funding often refer to the case of the UK rock band Marillion, whose 1997 tour of the United States was not only conceived by their fans, but also successfully financed by them to the tune of USD 60k. It provided funding where none would have otherwise existed and also served to highlight the other great advantage of being funded by fans / like-minded individuals: the close relationship that is likely to arise between customer and client.
Such a relationship provides third-party validation of the business idea (or not, in the case of initiatives which don’t attract funding), word-of-mouth marketing emanating from and beyond the investors’ network, and the opportunity to market test the idea or product through feedback from investors and their networks.
Crowd-funding as an alternative means by which to finance small businesses is still relatively new however, in comparison to its continued use in creative and charitable initiatives. Of the 344 crowd funding platforms listed on the ‘crowdsourcing.org’ website, only 16% are denoted as being ‘business’ orientated (49% creative and 35% charities). But the overall numbers are certainly growing very quickly, and different platforms are cropping up everywhere.
3 countries in particular, or, more accurately perhaps, the occupants of those countries, have been embracing the concept more readily than others. America, still the world leader in internet-based commerce, currently has the most official crowd-funding platforms with 138; the UK, because of its history as a financial services hub, has 32; and the Netherlands, with a long history of involvement in charity initiatives, has 24.
It is noticeable that these three countries also have high percentages of their populations actively using social networking sites such as Facebook and Twitter (close to half of the populations of these countries use them, a proportion which is likely to rise to 75% within the next six months or so).
In terms of the total amounts of money actually passing hands, the US is streets ahead of the pack with over a billion dollars generated in 2009, while in Europe the total value of crowd funded finance in 2010 was in the region of 100 – 200 million euros.
Within the context of climate change related ventures or projects, there are certainly some businesses already benefitting from this important new source of finance. These tend to be ventures that are in need of seed capital to take their various innovations to market, or specific (community-initiated) projects.
Indeed one such platform, US-based ongreen.com, deals almost exclusively with ‘green’ projects and claims to have so far distributed more than 164 million dollars to emerging companies, in sums ranging from tens of thousands to tens of millions.
It is still too early in the growth of crowd funding to accurately define the profile of the sort of people likely to become investors, but initial analysis seems to suggest that a project is more likely to attract capital if it appeals to people on at least one more level than simply the opportunity to make a financial return. This observation bodes well for the renewable energy sector as there is an increasingly discernible trend towards a ‘if we all pull together we might just save this planet yet’ mentality.
Indeed, research carried out by ‘mymicroinvest.com’ in America describes the likely investor as being relatively highly-educated (and therefore aware of current global issues such as climate change) with an above average level of income, and aged between 25 and 34. The size of an individual investment is highly dependent on the exact nature of the initiative, but it would not be unusual for a successful cash-drive of EUR 100,000 to attract an average investment of around EUR 100 per person.
As with most good ideas however, there are challenges which need to be overcome before it can really take off on a global scale. One of the most obvious disadvantages of seeking crowd-funding, rather than say, having a chat with your local bank manager, is that in doing so it is very difficult not to give away your idea to potential competitors.
The whole issue of intellectual property rights is one which needs to be addressed at an international level and in the meantime applicant businesses are encouraged to engage in early patent filing, along with normal copyrighting and trademarking procedures.
It has recently been reported that the World Intellectual Property Organisation is developing a completely new form of IP protection known as a ‘creative barcode’ that will hopefully provide at least a modicum of protection to inexperienced businesses or those which have no choice but to publicise their business plans.
The next most significant barrier to growth is trust. There are after all a million and one ‘investment’ opportunities available on the internet (even more if you include those involving Nigerian princes!) which means that one of the main challenges for crowd-funding platforms will be to differentiate themselves from these.
Another obstacle, and one which is already being addressed by the more established crowd-sourcing platforms, is that of financial regulation. Crowd-funding initiatives which are deemed to be soliciting investments from the general public, are illegal in most regions of the world if they aren’t first approved by the relevant securities regulatory authorities. The precise definition of what constitutes ‘investment’ and ‘soliciting to the general public’, will likely be the key to this issue.
The more pro-active platforms seem to be taking the view that regulation of some kind is essential if the fledgling sector is to avoid the negative impact of ‘rogue’ schemes, but at the same time hoping that a streamlined framework can be agreed that will avoid excessive bureaucracy.
To this end the ‘Entrepreneur Access to Capital Act’, which seeks to reduce current restrictions on small-scale crowd-funding of for-profit businesses seeking early-stage equity-based financing, was passed by the US House of Representatives in a vote of 407-17 last year and 3 more Acts are currently in various stages of the approval process.
In the Netherlands a proposal for a guarantee facility and a pilot programme for crowd-funding is undergoing parliamentary discussion.
Assuming these definitions and regulatory frameworks can be put into place quickly, there is every reason to believe that the next few years will see exponential growth in the use of crowd-funding platforms, particularly by start-up businesses in the clean technology sector.
Crowdfunding and renewable energy
