Crowdfunding: Financing small businesses in a post-crisis environment

Crowdfunding—an approach to financing start-ups and other projects by generating small contributions from a large number of people—was the subject of the Food for Financials seminar, which took place on 28 January and was organised by Maastricht University and Yacht employment agency.

Jaap Koelewijn, Professor of Corporate Finance at Nyenrode Business Universiteit; Ronald Kleverlaan, crowdfunding strategist and founder of CrowdfundingHub; Roeland Assenberg van Eysden, Senior Manager at Monitor Deloitte; and Arthur van de Graaf, CEO of SEEDS Investment BV spoke about this niche but quickly expanding alternative source of financing.

More information on the seminar, including slideshow presentations in Dutch, can be found here.

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A new concept?
Crowdfunding is an alternative to financing businesses through procuring funds from a bank, charities, or stock exchanges. Crowdfunding contributions are made by individuals directly or through a platform on the Internet. Crowdfunding is also useful as a marketing tool: to win support for a specific project, to get ambassadors instead of clients and so on. Sounds revolutionary, but the idea is not entirely new.

As prof. dr. Jaap Koelewijn said, “Crowdfunding is based on the way of financing that was common around 1900 when the mechanisation of agriculture had started. At that time, it was not possible for farmers to get a loan from the banks. They had to ask family and friends. The institutionalization of the financial market started after 1950. But since the financial crisis of 2008, the banks have become reluctant to finance businesses. Indeed, in general it is not very profitable to finance start-up companies and projects to develop new products.”

A viable alternative in a post-crisis world
The reluctance of the banks partly explains the sudden rise of crowdfunding. “This means that more worthwhile projects and businesses get funded than would otherwise be able to do so,” said Koelewijn, “and crowdfunding offers some advantages that other forms of financing do not. For instance, crowdfunding is a way to harness people’s goodwill towards particularly interesting and worthwhile ventures to help them secure funding. And crowdfunding offers lower transaction costs than most of the established channels. Crowdfunding is ideal for getting niche products off the ground. And last but not least, crowdfunding makes funding more personal.”

Connecting with your target market: More than just the money
Ronald Kleverlaan is a crowdfunding strategist, international keynote speaker and strong believer in crowdfunding and crowd financing. He began his presentation by pointing out that crowdfunding is more than just raising money. “The direct connection between the entrepreneur and the crowd gives people the chance to fund a more personalised product. The entrepreneur has the chance to appeal to investors’ motivations and interests as well as their wallets. Some forms of crowdfunding are close to charitable giving, where socially motivated lending is even interest free; funders expect to receive a warm glow rather than a hard cash return on their investment. The intrinsic and social motivation of the funder makes intangible benefits and rewards an attractive form of return.”

Still a niche—but growing fast
According to Roeland Assenberg van Eysden, crowdfunding in the Netherlands is not as rampant as in some other countries, but that is starting to change. “Globally, you see that it [crowdfunding] dependent on several factors,” he said. “One aspect is the regulation in each country. Another aspect is the way the government stimulates crowdfunding. For instance, in the UK, the government has put an amount of money into a crowdfunding platform. People see this is as an example of good behaviour and are therefore more willing to fund. The third factor is the culture. But crowdfunding is also influenced by the number of entrepreneurs in the country: the more entrepreneurs, the more crowdfunding is common as a way of raising money. And we see also that in countries where wealth is pretty concentrated, like the Netherlands, crowdfunding is growing fast.”

Avoiding old mistakes within a new system
Arthur van de Graaf is the CEO of SEEDS Investment BV, a crowdfunding platform. SEEDS is part of the bank ABN AMRO, the only bank in the Netherlands that works with crowdfunding. Van de Graaf also sees a lot of potential in crowdfunding. “Crowdfunding is hot right now,” he said.

But he also warned the audience to be careful and not naively make old mistakes within this new system. He pointed out that accountants and advisers play an important role in crowdfunding.

“In fact, entrepreneurs have to start with funding from their family and friends. If they achieve some success that way, they then ask friends of friends, etc. In addition to the motivations of the funders, communication with the funders is also an important aspect. Ideally, entrepreneurs will prepare a corporate story, which starts with the question of why they want this product or project or to receive this result.”

About the Food for Financial seminars
The Food for Financials seminars are held twice a year in cooperation with UM and Yacht. The seminars in this series offer an excellent opportunity to gain new insights and to establish contacts and expand your business network.

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