Current Challenges and the Future of Crowdfunding
The interview was made within the framework of the article number 451 for the business weekly ‘Leader’, in which the central theme was crowdfunding.
1. What are the key benefits of crowdfunding to start a business?
A key advantage is that the crowdfunding campaign can in advance test the market, and show whether it makes sense do kraja into more serious expenditures and further development of the company. Also, there is no collateral, and financial risk is dispersed to a great number of people, so if the project fails, no one would bear significant financial consequences. The well done crowdfunding campaign also serves as an excellent commercial and means to create a community around the project.
2. What are the main pitfalls of this economic model?
From the Croatian perspective, currently crowdfunding constitute a major challenge. The greatest weakness of the crowdfunding in Croatia are small population, small number of Internet users, low IT literacy, poor development and distrust towards electronic commerce, expensive postal services towards abroad, disincentive legislative framework and the financial impoverishment of citizens. Also, here the conventional wisdom applies that it is sufficient to run the campaign and that the success will come by itself. Crowdfunding campaign is essentially a marketing campaign whose success depends on a previously well-executed marketing campaign: it is only the tip of the iceberg.
3. Do you think that crowdfunding platforms will flourish in the future and become a competitor to VC funds, and why?
Crowdfunding has begun to be regarded as a competitor in general to everybody involved in investing or lending, but when we take into account that crowdfunding campaign can serve as an excellent indicator of profitability, I think that between crowdfunding and institutional investors and creditors may also develop a partner relationship and that they can be an excellent complement for each other, which can result in safer investments, healthier loan placements and an efficient use of money. What will happen to the crowdfunding in the future depends largely on legislative solutions. What we see is the on-going tendency to more bureaucratise and limits crowdfunding. Such trends are particularly disturbing, because the legislation has been adopted hastily, with no prior practice and without a clear definition of the crowdfunding.
4. How it works in practice, what kinds of models exist, how much the platforms charge for their services? How many crowdfunding platforms exist in the world today? Which crowdfunding platforms you would suggest and why?
Crowdfunding is based on four models of financing – donations, awards, loans and equity stakes. Choice of platform depends on which model you want to use for funding and what is the nature of your project. If you choose donations, the best choice is GoFundMe, Crowdrise or GivenGain, while Kickstarter, Indiegogo and Rockethub are the best choice for a model with rewards included. As for the models with loans and equity stakes the most popular platforms are Kiva and Zopa, i.e. Companisto, Wefunder, Seedrs, Crowdcube and Crowdfunder. Most platforms charge a fee for the successful completion of the campaign. For example, Kickstarter charges a fee of 5% and Indiegogo of 4 and 9%. In 2012 there were over 500 platforms, and today there are several thousand of them.
5. What are the most successful campaigns and kampanje here and abroad? What industries are represented?
The most successful Croatian crowdfunding campaign ever led is the ‘Machina Arcana’ from Varaždin that through the Kickstarter has raised over $ 140,000. Second and third place belong to computer games ‘The Red Solstice’ and the ‘Legends of Dawn’. Through the Kickstarter, ‘The Red Solstice’ has collected over $ 60,000 and ‘Legends of Dawn’ $ 46,000. Arguably the most successful crowdfunding campaign in the world is the computer game ‘Star Citizen’, which has so far raised nearly $ 44 million and is still raising money. As for the types of kampanje that are represented, there are almost all industries. For example, just recently through Indiegogo, a campaign has been launched for the craft brewery.
6. How are the local crowdfunding platforms doing?
Currently, the only operating crowdfunding platform in Croatia is Croinvest.eu. The reason is that the concept of crowdfunding is not widespread either in our country or in countries in the region. Research that was conducted by the Centre for Social Innovation and Sustainable Development, at the beginning of 2014, showed that only 1% of Croatian citizens, mostly younger, know what the crowdfunding is. Only few months later, the statistics was probably somewhat better, but not considerable. Also, Croatia is a small country with a small number of kampanje and a large number of constraints, what makes difficult to cover the costs of maintaining the system, especially if you take into account that the domestic Internet payment gateways are still very expensive. Moreover, until now there was not even a partial legal interpretation of the crowdfunding, and that is why there was no clear idea how to treat it.
7. What is the future of crowdfunding platforms in Croatia and in neighbouring countries?
Speaking given the current circumstances, the national crowdfunding platforms that will be exclusively oriented to the model with the rewards will have little chance of success, because it will not be able to compete with the already established platforms that are facing towards the entire world. However, national crowdfunding platforms can be successful in the field of equity crowdfunding and combining equity crowdfunding with reward crowdfunding, under condition that there is an enabling enticing legal framework and a sufficient number of quality kampanje existing. What I can see as a good solution for the crowdfunding in Croatia and in neighbouring countries is to launch regional reward-equity crowdfunding platform that would have the strength to annul most of the shortcomings of national crowdfunding platforms.
8. How does Croinvest.eu work?
Croinvest.eu is the first Croatian crowdfunding platform for financing entrepreneurial, infrastructural and socially useful kampanje, with particular emphasis on kampanje that apply for EU funds. The platform combines five models of financing (donations, awards, loans, ownership participation and profit participation) customized to domestic law so through the platform it is possible to: give money; pay money in exchange for a goods or services with a beginning at a specific time; to borrow money in the form of interest-free or interest investment loan at a specific time; invest money in exchange for an ownership interest in a limited liability company or cooperative; invest money in exchange for a share of the profits in by signing a contract on a silent partnership. The platform can be used by all domestic natural and legal persons and all foreign nationals who want to invest in Croatia. What is important to note is that Croinvest.eu introduces a new funding model that has not been known on a global crowdfunding scene, such as profit shares on the basis of a silent partnership.
9. What are the legislative, administrative and tax barriers in Croatia for crowdfunding? What should be changed?
In the context of Croatian law, we need to make more changes, especially to reduce costs and facilitate the establishment and transfer of equity interests in limited liability companies, to expand the circle of subjects which can deal with the Internet commerce and also to anticipate a tax deductions or even better to allow citizens independent disposal with the part of the tax. In the context of Europe and the world, the biggest problem is the non – uniformity of legislation. The European Commission recently announced the possibility of regulating crowdfunding at EU level, but I think that now is not the time for it, because there is not enough practice. Premature adoption of regulation could significantly harm crowdfunding and therefore, for now it should resist to such initiatives that go in that direction.
Journalist: Matilda Bačelić
Interlocutor: Zoran Rajn, founder of the Croinvest.eu platform