The first ever report on crowdfunding in the region
In its essence, crowdfunding is not a new phenomenon. Based on the principle of public collection for a specific purpose, crowdfunding, as we know it today, is made possible by modern technology. Now, anyone with rudimentary IT skills can launch an online campaign to raise funds from individuals for any project, and there are virtually no limits on funding appeals, from book publication or producing a telescope, to sponsoring a wild holiday adventure or paying for medication, or attracting shareholders to a prospective startup.
Collecting money with the help of varied Internet tools is an alternative to traditional models of financing (loans, credits, and grants), especially for non-profit or risk ventures. The infinity of opportunity generated by crowdfunding has been proven by two successful political public collections by Barack Obama and his election team, who raised around 450 euros and 160 euros from small donors for his presidential campaigns in 2008 and 2012 respectively.
Small wonder that this momentum was seized by Obama and his administration, who integrated the phenomenon into the American Jobs Act with the aim of revealing its potential to stimulate growth: “[…] right now, entrepreneurs like these bakers and these gadget-makers are already using crowdfunding platforms to raise hundreds of thousands of dollars in pure donations – imagine the possibilities if these small-dollar donors became investors with a stake in the venture.”
Acknowledging this potential, in 2013 the European Union organized public consultation to examine ways it could promote crowdfunding (CF), and we may soon see European legislation on this financial tool.
Although the first online campaigns emerged in the mid-1990s and the worldwide upsurge of crowdfunding platforms (CFP) came in the early 2000s, the arrival of crowdfunding to Central Europe was somewhat delayed. The phenomenon is as yet not widespread and many potential crowdfunding users are not aware of its benefits. Local crowdfunding platforms cannot boast great successes like those on American platforms, but the trend is on the rise in the region. Is Central Europe ready for crowdfunding?
What is it good for?
Basically, the answer is: everything. Crowdfunding takes many forms and therefore eludes clear definition, making it difficult to embrace it with one set of legal acts or to generate reliable statistics. A basic division can be drawn on the side of contributors’ (e.g., those who support a campaign) motivation: is it (1) non-profit, or (2) investment-oriented? To be sure, this is a rough classification, as most campaign contributors do get something in return for their financial support, yet the non-profit category implies no prospect of capital gain.These two elementary categories can be further divided according to the transaction type between the project owner and contributor.
Hence, the non-profit domain includes (3) donations – gifts, (4) pre-selling, often based on the principle of an e-shop with delayed delivery because a project will only be implemented once the requested sum is collected, (5) rewards in the form of a product/service usually of lower value than the contribution, e.g., issue of a supported book, (6) crowdsourcing or in-kind crowdfunding, in which the donor offers support other than financial (workforce, equipment, knowledge, etc.).
The other, profit-oriented, group also consists of several subcategories, such as (7) equity crowdfunding, in which contributors receive equity (share) in a company or business venture set up from the raised funds, giving them certain decision-making rights, or (8) property crowdfunding, in which a group of people acquire real estate. Another CF model on the borderline of the profit category is (9) peer-to-peer lending, which takes place outside the framework of regulated institutions – such as banks – and can be executed with or without interest rates.
Viewed from the technical angle, CF can be performed on (1) project-related websites run by project owners themselves, or (2) platforms operated by intermediaries offering fund-seekers tools to collect money for their cause. This basic typology does not claim to be all encompassing; it is merely an attempt to outline the crowdfunding environment.
More than merely a fundraising tool, crowdfunding has many collateral effects. It can be an effective way to collect invaluable market feedback at a relatively low cost and allows for an idea to be tested for attractiveness by its potential recipients. Additionally, CF campaigns are better suited to generate communities of supporters for a given project or cause, as they do not resemble traditional marketing crusades. Information is collected simultaneously to funds at no additional cost, and – if skillfully used – may be worth more than the actual money. The versatility of crowdfunding makes it very useful, especially for creative individuals, small and medium enterprises, and the non-profit sector.
SUCCESSFUL V4 TECH CAMPAIGNS ON GLOBAL PLATFORMS
|Project||Funds raised / €||Platform|
|DELIVERANCE Czech realistic single-player RPG set in the medieval Europe||1,402,109.60||KICKSTARTER|
|SUPERHOT first-person shooter game designed by the a team from (PL)||186,164.49||KICKSTARTER|
|CULCHARGE smallest USB charge and data cable for iPhone and Android (SK)||70,005.98||INDIEGOGO|
|DARKWOOD game (PL)||42,550.21||INDIEGOGO|
|FEEL FLUX physics toy (HUN)||27,403.81||INDIEGOGO|
|MONTHLIES educative film (SK)||24,495.52||INDIEGOGO|
|FULL HD screen upgrade kit for the Oculus Rift DK1 (CZ)||18,641.09||INDIEGOGO|
|PIKKPACK flat-packed shoe (HUN)||14,925.94||KICKSTARTER|
PROJECT TRAFFIC ON THE MOST REPRESENTATIVE CFPS IN THE V4
|CFP||Nº projects (active + finished)||Success rate (%)|
|HITHIT Czech Republic||356||44.14|
|CREATIVE SELECTOR Hungary||77||6.49|
|POLAK POTRAFI Poland||995||38|
Source: presentation of the data available on the platform sites (as of 1 July 2014).
Click the infographic below:
The state of play in the V4
The general characteristics of crowdfunding in the V4 amount to this: preference is expressed for small-scale projects that do not carry risk for contributors. Most platforms imitate the mechanisms and build upon the know-how of popular North American sites, but they need to adjust their activities to the existing, slightly chaotic, legal environment. Dominating forms of crowdfunding are simple; reward and donation models prevail. The biggest disadvantage by far is that the crowdfunding market in CEE remains limited to cultural and charitable projects and lacks the innovative projects that are being fund-raised elsewhere.
Crowdfunding became known in CEE as early as the mid-2000s, when individuals embraced the opportunities provided by foreign platforms. Julia Marcell for example, a Polish-German singer and pianist, raised funds for her music album on the Dutch platform Sellaband in 2007. Thanks to successful cases from abroad, the idea was soon transplanted to this region and the first platforms were established. In 2011, inspired by foreign models that proved successful in the United States, the Polish “Polak Potrafi” (“Poles, they can”) and the Czech “Fondomat” were created. More soon followed and now there are a number of crowdfunding platforms or websites in each of the Visegrad countries. There is certainly a long way to go before the V4 countries develop a strong CF environment; however, there are some noteworthy examples of applications of this fund-raising method, which prove that the opportunities it provides could be much better exploited in our region.
In the U.S., it took around two decades to fully install crowdfunding as an established way of financing ideas and enterprises. The evolution process usually comes in four consecutive stages. First, crowdfunding starts to be perceived as a solution to individual cases and is conducted through single-purpose web sites only. Later, as it grows in scale, intermediary platforms appear. Then comes the market creation stage, when experts, advisors, and media promote and develop the tool. Finally, the “asset class” stage follows, in which the necessary legal regulations and good practices are worked out to protect the interests of both CFP owners and their users. Crowdfunding in the V4 currently seems to be in the second phase of development; a market of intermediaries is forming across the region. The first CFP in Slovakia was established only this year and most projects still use their own dedicated web sites.
Although the four countries’ CF environments are similar, they have a few differences. When viewed from the motivation angle, non-profit CF campaigns are by far predominant, with donations and rewards as the preferred transaction models. Most sites in the region run in accordance with regulations that apply to e-shops. Other CFPs organize their activity around the concept of a “donation” and operate on legal acts related to foundations. When it comes to revenue-oriented projects, few equity crowdfunding platforms exist only in Poland, and even fewer are active. They are “Beesfund,” “Crowdangels,” “Crowdcube,” (the Polish branch of the British “Crowdcube”) and “Wspolnicy.” Beesfund was the first; strangely enough, the sole project that successfully sought funding through this website was the platform itself! The current proliferation of equity investment platforms in Poland is quite striking, as there are almost no examples of successfully funded projects of this type.
In terms of content, cultural and social campaigns, as well as charity-based ones, prevail. The analysis of the project deal-flow on the national CFPs demonstrates that sites are used mostly for community-oriented projects, which usually do not require a great deal of cash support and reach out to local needs or sentiment rather than individual interests. For instance, the Polish CFP Siepomaga.pl (“One helps”) created – with great success – a system of financial support for all sorts of patients whose lives are in danger or who badly need to improve their health. The site’s popularity is greatly due to the charitable motivation of contributors. They seek to step in where state institutions (the health care system) fail, when these are unable to provide help. The most successful Czech platform, Hithit, has hosted 25 “community” projects, 66 “music” projects and 113 projects tagged “film,” “art,” or “literature” so far, while it has only had five “tech” projects.
Music campaigns also generate the most funds: for the organization of the big United Islands music festival in Prague, the campaigners received 63,225 euros from 3,692 backers. Similarly, the most popular projects presented on the Hungarian site Creative Selector pertain to the categories of “civic society” (there are sixteen on-going and two successfully financed projects) or “events and festivals” (fifteen on-going and one successfully financed). Finally, the Adjukössze (“Let’s add it up”) platform is entirely dedicated to social projects within the non-profit sector: there are four on-going and nine successfully financed projects. The situation is no different in Slovakia; it is nevertheless difficult to present any statistics as the first CFP, “Ideas Starter,” was launched only at the beginning of 2014.
It seems obvious that cultural projects, strongly rooted in national (or regional) mentalities, are promoted on national platforms rather than referring to big ones abroad, such as Kickstarter or IndieGoGo. These sites, however, offer the opportunity to reach individuals all over the world and therefore to raise more funds, which is why there are preferred by CEE startups and innovators. Their global outreach is not the only reason technology projects seek funds outside CEE countries. Technical literacy is relatively underdeveloped in all V4 countries and risk-taking related to startups is rather low, motivating CEE geeks to invest in global campaigns.
Compared to the above-mentioned global platforms, the traffic and success rate on platforms in CEE is still in its nascent phase. Within the region, Czech and Polish CFPs are doing relatively well, while in Slovakia an intermediary platform has just been established and activity on Hungarian ones is quite low.
To date, the platforms have managed to steer clear of legal problems with intellectual rights or fraudulent behavior. This is why, in spite of the fact that current legislation on crowdfunding is tremendously fragmented; there is currently no motivation to conduct regulatory activity. In Poland, the legal status of crowdfunding was not clear until recently. A 1933 public collection bill demanded that all money e-transfers ought to seek official permission prior to collection, a situation that had continually been contested by providers of CF sites. In fact, various judicial acts were pronounced in favor of crowdfunding campaigns’ legality, even if they had not been given official permits.
The Polish CF community welcomes the new law introduced by the Ministry of Digitization, which finally introduces legal certainty in this respect. As already mentioned, Czech CFPs operate on the legal basis of e-shops (and as such they need to pay VAT from services provided) or fall under the category of donation-receivers, with no need for filing request to organize collection. The situation is similar in Slovakia, where most CF campaigns are donation-based. The Slovak Ministry of Interior is now preparing an act to establish a registrar of public collections, obliging fundraisers to post information on money collected. Hungarian platforms, just like those in other V4 countries, accommodate their functioning to existing laws and practices, as none have legislation specific to crowdfunding. The question remains, however, if one really needs to regulate a phenomenon as diverse as crowdfunding.
According to the 2013 CF Industry Report, 2012 was a turning point for crowdfunding: globally, the CFPs raised a total of 2.004 billion euros, compared with 1.1 billion euros in the previous year (numbers are totals for all types of transactions). The greatest growth (by 105%, to 1.2 billion euros) in crowdfunding volume was made in North America, while European crowdfunding volume saw 65% growth and reached 735 million euros, a number ambitious enough to compete with the shrinking venture capital in the EU (3 billion euros), but far behind the European IPO markets (approx. 16.5 billion euros). This rapid growth of the European CF markets attracted the attention of EU institutions.
Recognizing the potential of crowdfunding to strengthen investments, the European Commission conducted a public consultation in 2013. Its main objective was to investigate if it would be desirable to design EU activity to promote crowdfunding in Europe. In the disclaimer of the public consultation document, the commission states that crowdfunding could be beneficial from an economic point of view, notably that it could “contribute to bridging the finance gap for small firms and innovative projects,” while “better access to finances for small businesses would promote entrepreneurship and ultimately contribute to growth and job creation.”
Disappointingly, the markets in the V4 are much more modest. The most recognizable platform in Poland, the aforementioned Polak Potrafi, raised a total of 894,364.40 euros (as of July 2014). On Kickstarter, the total amount of money collected was almost 0.9 billion euros! The most successful project on the Polish CFP, the “Cohabitat Gathering” Festival, amassed 23,658.84 euros, which is impressive for Poland but still very little when compared to the more than 7 million euros obtained on Kickstarter by the creators of “Pebble,” a customizable watch.
Finally, the most popular project on Polak Potrafi received 1,007 individual contributions, while the most successful projects on Kickstarter receive on average tens of thousands of backers (e.g., the Pebble Watch, with 68,929 backers). In the Czech Republic, the most active CFP, Hithit, mobilized around 270,000 euros, mainly for cultural projects. Hungarian sites have been less fortunate, as project traffic gathered only 70,000 euros. The numbers for Slovakia are difficult to determine because the first CFP was established only recently, but even two website campaigns outdid the sum raised on Hungarian platforms: Martin Šútovec (Shooty) collected over 80,000 euros and Marek Adamov, with his slogan “Buy Yourself Immortality,” has so far raised 70,000 euros to rebuild the New Synagogue in Zilina as a cultural center.
The power of versatility
Despite its potential and great flexibility, crowdfunding will not replace other forms of financing. Still, it can become an important fundraising tool, especially for non-profit and startup companies. Thanks to its adaptability, crowdfunding can be used as a tool in conjunction with already existing funding schemes and in-kind support. Inspirational examples are not far to be found.
Incorporating crowdfunding into fundraising strategy seems to be the easiest model. For instance, the non-profit organization and the publisher of Transitions Online magazine, “Transitions” (or TOL), launched a crowdfunding campaign on the IndieVoices platform to raise money for independent journalists in Russia (the project is called “Weathering the Storm: The Dangers of Going Green in Putin’s Russia).
Cooperation with foundation. A worthy example is the cooperation between the Czech Vodafone Foundation and several non-profit organizations. The foundation promised to give the NGO a gift provided that the project successfully raises a certain sum via crowdfunding. One such example is Rekola, an independent bike-sharing system in the Czech Republic.
Specialized CFPs can provide exchange and support platforms for causes or professions. The Czech Music Cluster is dedicated to music projects exclusively and assists young musicians not only financially but also through mentoring.
Public institution as intermediaries. The case of projects that receive a certain proportion of funding from public institutions and the rest from crowdfunding are especially interesting, as the participation of public institutions may act as a guarantee of implementation and/or plausibility. The Polish platform “Wspieram Kulture” organizes regular events that are co-financed by funds from the Ministry of Culture as well as crowdfunded.
Non-profit institutions as intermediaries. In the case of the Hungarian Adjukössze, an association of NGOs decided to establish and run a platform to help its members find financing for their projects.
Business models are harder to find, but one example, if proved successful, may change the game in our region. The Polish Stock Exchange has recently come up with an initiative to create its own crowdfunding platform in order to reach a new target audience: microfirms and individual investors with limited funds. Obviously, the initiative, patronized by a prestigious public institution, would give more credibility to crowdfunding. At the same time, however, it might monopolize the activity “of the crowd.”
From crowd to community?
The nature of crowdfunding has many collateral effects. It generates more than financial value as it brings positive change to social relations, stimulates the creation of community, and strengthens social and local ties. It would therefore be desirable to promote its use and assist its development. Public authorities or non-profit associations could, for example, following the Australian initiative, conduct an information campaign about crowdfunding, and commission a study to point out the best practices and share them with CFP users seeking fund-raising.
More strategically, crowdfunding could also be encouraged at the transnational level, via regional platforms. Although it seems that nationality is still a very strong source of identity for backers of crowdfunding campaigns, one could imagine similar identification on the basis of, for example, common regional origin. In this sense, crowdfunding could turn into a useful tool for fostering regional cooperation and building a more distinct and recognizable regional identity.
Crowdfunding – as a valid instrument of financing initiative and ideas – could, potentially, generate a new dimension of economic and cultural cooperation in the V4 countries, strengthening people-to-people contact, and, if well organized, the platform would provide legal certainty and eliminate many accounting problems that campaigners have when fundraising abroad. So shall we crowdfund Visegrad?
The article was published in Visegrad Insight 2 (6) 2014 as part of Crowdfunding Visegrad, a project conducted by the Aspen Institute Prague, together with Res Publica, Creative Industry Forum, and The Budapest Observatory, and supported by the International Visegrad Fund. For more information visit: http://www.aspeninstitute.cz/en/news/crowdfunding-visegrad-project-outcomes/
Olga Urbańska works for Res Publica.
Maria Staszkiewicz is the Deputy Executive Director at the Aspen Institute Prague.