How Does the Crowdfunding Boom in Switzerland Affect the Rest of Europe?
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Raising seed funding is the first "life or death" roadblock for most early stage startups, and the overall dip in the early stage VC funding in recent years is making it increasingly challenging for many startups to take their product from concept to market.
Recent studies show VCs have become more cautious, tending to invest more in fewer deals in the hunt for the next unicorn, and while the European venture industry has grown extensively, it remains a "smaller round, smaller exit" market in comparison to the U.S. On top of that, factors such as Brexit are making investors uneasy, and newer European funds are struggling to raise capital. All of these factors are hitting early stage startups the hardest.
But, the fact that early stage funding through traditional channels has dried up has only driven startups across the continent to look for alternative means of raising funding to keep their heads above the water -- namely, through initial coin offerings (ICOs) or crowdfunding channels. But, both of these channels are still suffering from growing pains. All too frequent ICO scams, and indecision from regulatory bodies, are reducing investor trust in crypto investments, and until recently equity crowdfunding has been living in a legal limbo across the EU region.
But, while the EU has been slow to make up its mind on crowd-based investment platforms, one country has jumped into the area with both feet: Switzerland. Between 2008 and 2018 more than 40 equity crowdfunding platforms have emerged in the country best known for strength in the traditional financial sector. So, why is crowdfunding taking off within the Swiss cantons, and what does this mean for the rest of Europe?
Why is crowdfunding blowing up?
Many argue that the traditional VC model has been broken for years. Experts have long warned that the industry has become "a lottery system where a few make unbelievable fortunes while the rest lose someone else's fortune," and argue that accessibility needs to be improved both for startups seeking funding, and for potential investors who are blocked from entry.
As such, many small-business owners and startups have been looking to the crowd to raise the seed money they need to survive, and many micro-investors have been jumping on board to get their piece of the pie.
Crowdfunding as a model inherently solves many of the issues plaguing the VC industry. While VCs tend to pile huge investments on a small handful of potential "future Facebooks," crowdfunding encourages large networks of micro-investors to invest small amounts into multiple projects. But, as crowdfunding unicorns like Revolut and BrewDog show us, when companies and their projects are eye-grabbing enough, they can raise large rounds from large networks of crowd investors.
And while VCs tend to hedge their bets with only the strongest startups who can return three to 10 times on investments, crowdfund investors are more likely to take a risk on projects that resonate with them personally, rather than simply looking for cash cows. This is important, as many more conceptual startup ideas in their early stages -- such as Airbnb -- struggled to convince VCs to take a risk on a large investment. However, harnessing the power of the crowd, there is a much higher chance of bringing on a number of small investments.
Crowdfunding also solves the liquidity issue of VC investment. Most VC funds last for 10 years, and the average time to exit for funded startups is now 8.2 years, meaning VCs need to wait long periods before seeing any return on investments. Many leading crowdfunding platforms have solved this issue by offering secondary markets, allowing investors to sell their shares to other investors within the community, and cash out whenever they please.
But, arguably, the most important factor is related to the accessibility issue. Being invited to become a limited partner in a VC fund requires extreme wealth and reputation. On the flip side, crowdfunding platforms in their essence are designed to be accessible. While many platforms will set a minimum investment -- anything from €100 to €1000 -- anyone with a bank account over the age of 18 can get involved.
Why is Switzerland pushing ahead?
While still dwarfed by more developed crowdfunding ecosystems in the U.S. and the U.K., with more than 43 crowdfunding platforms, Switzerland has left the rest of mainland Europe trailing far behind. And with uncertainty about Brexit, and its effects on U.K.-based startups, Switzerland could be an attractive new location for any British crowdfunding players looking to jump ship.
The growth of the Swiss crowdfunding community will certainly be catching the eye of other European crowdfunding players. In 2016, more than CHF 100 million was raised on Swiss platforms, which was more than tripled in 2017 with CHF 375 million raised. Experts predict that this year, platforms may even smash the billion franc mark.
But, why are the Swiss mountains such a ripe breeding ground for crowdfunding organizations? Is there something in the alpine water?
Maybe. Switzerland has always played a strong role in banking in Europe, has the highest global ratio of financial sector contribution to the national GDP, ranks at the top of the global innovation index and for a country of its size, has an extremely active startup ecosystem.
Local startups enjoy a steady flow of tech talent from highly regarded technical colleges, such as the École polytechnique fédérale de Lausanne (EFPL) and the Swiss Federal Institute of Technology (ETH), both of which regularly make the top of the Reuters' list of the most innovative European universities. While for decades, most of the top talent was channeled directly into the banking sector, or local pharmaceutical, life science or engineering companies, nowadays, the younger generation is increasingly trying their hands at startup innovation. And many money-minded Swiss innovators are gravitating toward fintech, crypto and invest-tech projects.
But, the importance of government support cannot be underplayed. While previous administrations had been criticized for a lack of support for local entrepreneurs, last year Swiss Economics Minister Johann Schneider-Ammann announced a new government-backed private fund that aims to raise as much as CHF 500 million to help local startups. Backers include Credit Suisse, UBS, Mobiliar and a number of large banks and insurance funds, and government representatives have stipulated that at least 60 percent of the fund must go to companies physically located within the country.
And while the EU commission is still deliberating about the future of equity crowdfunding in Europe -- having released a proposal for a regulation on crowdfunding service providers in March 2018 -- the Swiss government is one step ahead. The government released new legislation in 2017 that loosened existing banking restrictions, and created a legal framework that allowed platforms to raise funds from private investors in return for equity.
This new legislation pulled equity crowdfunding platforms out of the legal gray zone, encouraging local micro-investors to get involved in funding real estate, small business and startup projects. Due to its strong history in the financial sector, Switzerland has a reputation for secure and reliable organizations, and local crowdfunding platforms have put an emphasis on making investments transparent and secure as a means of gaining the trust of local investors.
The fact that Switzerland is also growing in profile as a blockchain hub -- with Zug now known as Cryptovalley -- could well see more incorporation of the blockchain into crowdfunding platforms to improve transparency and security through the use of smart contracts and secure tokens.
How this could influence the rest of Europe?
The Swiss crowdfunding boom is arguably setting a precedent that will hopefully influence future legislation across the rest of Europe, and open up new channels to the benefit of startups, small businesses, and micro-investors alike.
The EU has long searched for a model that can stop the brain drain of emerging tech companies and talent heading to the U.S. to raise funding and ultimately scale their businesses. While crowdfunding platforms do not solve the seed funding issue outright -- and one can only hope that the European VC landscape will regrow in strength once the Brexit situation becomes more clear -- equity crowdfunding does offer a model that is safe, inclusive and potentially scalable all over the globe.
These platforms democratize the process of investing in startups for financial return, and could offer millions of Europeans an alternative way to diversify their incomes, and save for the future. If the new equity crowdfunding model continues to thrive in Switzerland, a country which prides itself on safe and secure financial practices, it will offer validation to the rest of Europe, and is likely to inspire VCs and other smaller investors to get involved -- and invest their capital in these channels, too.