Although Unites States is home to the most recognizable crowdfunding platforms, Europe has very strong advantages in the field of equity crowdfunding. If negotiations regarding the Transatlantic Trade and Investment Partnership (TTIP) agreement are finalized one day, European FinTech startups will be in a great position to beat the world’s biggest peer-to-peer finance market.
By Daniel Daboczy, CEO and co-founder of FundedByMe
One of the hottest business topics in the recent weeks is the Transatlantic Trade and Investment Partnership (TTIP). The negotiations between the American administration and the European Commission are held behind closed doors which leads to uncertainty and results in speculation on how the Treaty could be harmful for European business. Will it be? Well, I don’t know but I believe that there will be some disadvantages. However, TTIP means also big opportunities for enterprises from the old continent, especially the innovative ones.
I have just come back from my tour of American leading crowdfunding companies. They are observing carefully what’s going on in the market across the ocean, especially when it comes to equity-based crowdfunding. Right now their managers responsible for their homeland market cannot do much more, because of legislation. Despite that President Obama signed The Jumpstart Our Business Startups (JOBS) Act in 2012, the Security Exchange Commission still has not finalised the implementation process, which was supposed to happen before 1st January 2013. Without this, no shares in crowdfunding model can be offered to the public (except friends, family and accredited investors), if the company is not registered. This is, however, pretty costly and very few of entrepreneurs in the early development phase of their business can handle this.
But one day the legislation process should be finalized and both JOBS and TTIP will become the new reality. What does it mean for the crowdfunding business?
Due to dynamic increase in equity crowdfunding, which can be expressed by more than hundred percent of growth annually, Americans will not loose a moment to enter the competition. Well, some are already in – in the States they already operate platforms with offers for accredited investors only. Since September 2013 these platforms raised $400 millions for entrepreneurs listed on them.
This is, however, still a drop in the ocean of the US startups – in 2011 alone Facebook Inc. raised $50 billion from private investors. In terms of targeting a wider audience the US crowdfunding platforms will have to start from scratch. On the other hand European platforms have run equity-based crowdfunding for couple of last years now. Crowdcube (UK), Ulule (France) or FundedByMe (Sweden-based but operating worldwide) hold firm positions at the global crowdfunding scene.
There is no better school than practice. Examples? Here you go. Groups of funders interested in rewards and those who invest instead of equities are very different. However, it is possible to convert the first one into more profitable segment. To do it you need a know-how gained from real life operations. Europeans should already have it.
From an American point of view the European market is not transparent/easy. Around 510 million citizens is a significant number, but they live in relatively small countries, where legislation varies significantly from country to country. Even the interpretation of some particular provisionslooking similar on paper may be differ, depending on the legal landscape. Not so long time ago the Spanish government considered to significantly limit opportunities for peer-to-peer lending, when the British Financial Service Authority incorporated the provisions in its regulations just couple months later.
Although there aren’t many crowdfunding companies operating in cross-border mode, these that do know how to deal with these issues. FundedByMe has its own representatives in 7 countries on 2 continents, but lists fundraising campaigns by entrepreneurs from many more. Because of this FundedByMe is much more used to balance between various watchdogs and fulfilling their requirements.
Looking at this from opposite perspective, American market should be much easier for European platforms: one law, one interpretation and ca. 320 million customers. A perfect opportunity for scaling up the business.
Advantage in mindset recognition
Last, but not least on that list, is a customer’s approach to apotential equity offer. The EU probably wouldn’t be so grateful for US crowdfunding companies as they may expect. Although capitalization of equity market in UK in 2013 was 121% of GDP, in Lithuania, Latvia and Cyprus it was less than 10%. There are many reasons for this , but one of them is that people in different European countries are much less keen to allocate their savings in such sophisticated financial instruments.
Americans are considered to be just the opposite. Investing and actively taking care of your own financial situation is one of the commandments of a successful Yankee. From a business perspective it is much easier to convince those who are familiar with the process to particular brand rather than running a long-term category awareness communication campaign. The US companies which dream about conquering America will have to do the first,; Europeans – the latter. Assuming that both parties will be equally determined in achieving their business goals, the competition opened by TTIP and JOBS will be really fierce.