No Towels on the Crowdfunding Beach

Added Tuesday, August 15 2017

The UK is a world leader in crowdfunding. While we could waste a lot of time debating the exact definitions, it’s a fair summary to say the UK has around 80% to the rest of Europe’s 20%. And we beat the Germans hands down (but not on penalties of course).

However, since they are probably number two in Europe, some recent research into how the German crowdfunding industry works is particularly interesting. 

Whilst our numbers are bigger, Germany appears to be more efficient – now where have we heard that before? In the UK the two best known platforms, Seedrs and Crowdcube, manage to get 40-50% of their companies funded. However, their German equivalents, Seedmatch and Campanisto, achieve over 90%.

So what is going on?

Most people believe that crowdfunders work on what is known as a ‘spray and pray’ approach. So they upload a lot of companies and let the crowd decide what’s good. However, in reality, this is too simplistic. Most platforms do quite a bit of pre-selection before uploading a new company. You might argue as to whether they do enough and sufficiently in-depth checking, but certainly the process is not trivial.

German academic Jonas Löher researched the nine largest German crowdfunding platforms, representing around 90% of their market. And it seems that the word ‘Nein’ is being heard a lot as only 20% of their applications even get as far as an interview with crowdfunder staff. So the percentage, which subsequently make it onto the platform for investment, is much lower.

However in the UK, according to NESTA, the average acceptance rate to actually be put up to the public on the platforms is 20.6%. So it seems more of our applications get past the crowdfunding gatekeepers and in front of the crowd.

The German study then dug into the under-the-bonnet processes used by their platforms and they look remarkably familiar if you are a conventional investor. Some concentrate on geography, others on sectors and most really worked on conventional face to face meetings with the companies.

And their sourcing methods also looked very familiar. They prefer to source potential deals themselves, often attending pitching events and taking referrals from trusted sources including business angels.

What they do not like are cold applications. In fact some German crowdfunders simply won’t look at any of these. Of course they work on line, however they are unlikely to be influenced by what they see there – instead they much prefer to meet face to face. 

One comment which came back from the research was ‘if you can’t convince me in person, how do you expect to convince my crowd on-line?’

In fact the research showed that many German crowdfunders act as if it was to some extent their own money being invested. Comments came back like ‘having a clear conscience when people invest’ and that their ‘growth is closely connected to the success of their investors’.

Most also selected on the basis of the likelihood of being able to win follow-on financing.

After considering all of the feedback in the research, Löher comes up with a startling conclusion. He believes that there are strong parallels between the behaviour of conventional venture capital companies and the German equity crowdfunding sites.

So, while crowdfunding is the exciting new kid on the block, it seems that much of its behaviour is actually a chip off the old block.

Some things don’t change and those towels will remain on the beach …

Alan Watts is the Director of Capital Match at Catalyst Inc (formerly the NI Science Park).

For more information about Capital Match or to contact Alan, go to www.capitalmatch.catalyst-inc....