Top image photo: Franek Strzeszewski/gettyimages
We’ve all got a vague notion of what crowdfunding is. If you were in the boutiques of Vesterbro in Copenhagen or perhaps taking a coffee in London’s Hoxton, you might even have overheard young, hipster-ish types earnestly discussing their next crowdfunding push in between the flat white and the gluten-free croissants.
But, as Nordea’s Klaus Westerlund explains, there’s a lot more to it than just putting together a snazzy video, crossing the fingers and hoping for the best. It’s become a serious business and if your plan isn’t up to scratch, it won’t prosper.
“Crowdfunding investors tend to know what they are doing but the reasons behind their investment decisions are often more diverse compared with traditional investing,” says the Nordea chief sales manager. “Studies indicate that the three key motives to invest into non-listed companies via crowdfunding include timing, influence & learning, and excitement.”
Westerlund elaborates on those three drivers as the desire to enter at a time of growth, a chance to be close to the management of the company and the hope of unearthing a diamond.
“There are more and more professional investors nowadays,” says Helsinki-based Westerlund. “There are also a lot of investors involved who just want to support an important cause or local entrepreneurs and in these cases, motives and goals are something different than just achieving financial gains.”
That rule applies just as much to equity crowdfunding, effectively the latest evolution of the money-raising phenomenon, and the area in which Nordea operates.
“Equity-based crowdfunding really started to emerge around 2012/13 as businesses sought a cost-effective way of raising money, coupled with a need to publicise their business,” Westerlund says. “Almost half of the growth in equity-based crowdfunding in the UK has come from professional investors.
“Professional investor involvement is also increasing in the Nordics.”
Almost half of the growth in equity-based crowdfunding in the UK has come from professional investors. Professional investor involvement is also increasing in the Nordics.
That push has also been underpinned by an entrepreneurial start-up culture that has been increasingly evident in Scandinavia over the last few years.
“SMEs in particular have begun to explore it as an alternative means of financing,” he says. “The way was led by the UK and we now see, for example, that 29% of SMEs there with a turnover of less than £2 million and 9.5% of the total SME lending volume in 2017 got their debt financing through peer-to-peer platforms.”
That evolution of the sector has also seen big players emerge at the centre of the industry, bridging the gap between the startups and investors eager to be in on, if not perhaps the next Spotify, at least something that could offer significant returns down the line.
“Invesdor were already in this market and perhaps we hadn’t really yet developed the capabilities on the platform to effectively offer crowdfunding services,” says Westerlund. “SMEs, startups and growth companies come to us and then we see if there’s a good match to the Invesdor platform, and let Invesdor do the due diligence. We don’t necessarily have to do everything in-house.”
Instead, Nordea’s partnership with Invesdor has become a real win-win, or, if you add in the startup seeking investment, a win-win-win even. So far the partnership has been limited to Finland and out of five startups that Nordea’s crowdfunding board has approved, four achieved their funding goal and two more are soon to come on line.
“That’s a pretty good success rate,” says Westerlund. “But this is more than providing the Nordea stamp on a startup’s business. We give them advisory on different funding/ financing options and try to find them the best combination of different solutions.
“We might provide a conditional credit decision which is triggered by a successful crowdfunding round and not least a lot of social-media support. For this we get part of the success fee if a startup achieves its crowdfunding target.”
Nobody’s suggesting the risks aren’t there. Westerlund cites a FIBAN analysis on early-stage, non-listed companies (though not restricted to crowdfunding as a means of raising finance) which showed less than 10% of ventures turn out to offer a really good return. While that means they fall squarely and fairly into the “risky investment” sphere, the same report indicates returns can be made and that in 10% of the cases, profits hit 72%.
Via the Invesdor platform, the crowdfund raiser typically has a minimum and maximum target and campaigns on the Invesdor platform last for approximately four weeks. Indeed, so successful has the partnership been in the last year, that Westerlund is keen to see the model rolled out across Scandinavia.
We may well be moving to an era where we see many new alternative finance solutions
“We do have plans and we’re keen to see it in other countries too,” he says. “We hope it happens this year.”
It’s been quite an evolution for Westerlund, who struggled in the early days to convince colleagues that this was an area a traditional bank should explore. But the proof has ultimately come in the pudding and, with some clients deserting a rival Finnish bank to take on Nordea’s crowdfunding offering, it has certainly helped him present the case for alternative financing.
“Not many big banks have done this in the past and there was some internal resistance but opinions are changing,” he says. “We may well be moving to an era where we see many new alternative finance solutions we offer to our SME segment clients and hopefully also moving to debt-based solutions we see a lot of potential and interesting opportunities going forward.”
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