Crowdfunding in Finland 2014- A detailed Analysis of Equity Crowdfunding Lester Allan Lasrado EMMi Lab. Tampere Univ. of Technology (TUT) www.tut.fi/emmi +358 417016463 lester.lasrado@student.tut.fi Artur Lugmayr EMMi Lab. Tampere Univ. of Technology (TUT) www.tut.fi/emmi +358 40 821 0558 artur.lugmayr@tut.fi ABSTRACT The phenomenon of the Crowdfunding has been growing at a rapid pace in Finland, with it being seen as fundraising and effective marketing tool. Companies especially start-ups have started using the power of the crowd to promote their ideas and products, for fund raising and are more open to use Crowdfunding as an additional source of finance during their first round of financing. The effect of global platforms like Kickstarter and Indegogo in addition to successful ventures like Timo Vuorensola s campaigns for the new movie Iron Sky popularised Crowdfunding in Finland, especially among the younger crowd. Within the scope of this paper we analyse the growth of Crowdfunding in the Finnish context. We conducted a literature study based on data collected via the existing Crowdfunding platforms operating in Finland. The study analyses the data, identifies parameters surrounding a successful campaign in Finland and finally visualises the data collected. The analysis shows that Crowdfunding has not only picked up in the Helsinki and Tampere region, but is also slowly attracting entrepreneurs from smaller cities in Finland. Equity and reward based Crowdfunding has managed to raise over 2.6 million Euros in Finland, while attracting over 140 campaigns and over 1000 active crowd investors. The major share of fund raised is towards equity Crowdfunding with Invesdor posting over 10 successful campaigns with around 2.1 million euros raised. Mesanaatti.me emerged as a leader in reward based Crowdfunding raising over 266K euros while attracting 85 campaigns. Overall Crowdfunding has seen a significant rise in Finland; however factors influencing the success of a campaign are yet to be fully explored. Categories and Subject Descriptors K.6 [Management of Computing and Information Systems]: General - Economics General Terms Management, Economics, Experimentation, Human Factors, Theory. Keywords Crowdfunding, entrepreneurial finance, motivation, disruption, entrepreneur, social media, Finland. 1. INTRODUCTION Over the last few years, Crowdfunding in USA and Europe has contributed a significant source of financing new businesses with more than 2500 Million Euros raised in 2012 alone and has grown at the same pace in 2013 as well [2]. This highlights the fact that CF phenomenon is growing rapidly both in terms of funds raised and the number of active platforms around the world which stand at more than 450 in 2012 and have grown to over 600 currently [14]. The phenomenon of CF has gained momentum in Finland and seen the emergence of five active Finnish platforms as e.g. Mesanaatti.me, Invesdor, FundedByMe, Fixura, and Venture Bonsai and received high media attention through the recent controversy of a book campaign by Senja Larsen on Kickstarter as a result of legal problems with the Finnish Police [14]. According to [14], Crowdfunding Platforms in Finland are compiled in Table 1. In addition to the platforms operating out of Finland, many international CF platforms like Kickstarter, Indegogo and many others have attracted public attention too. Currently the investment attracted by equity and reward based Crowdfunding platforms is around 2.6 million Euros. However peer to peer lending platform Fixura.com has attracted over 15 million Euros [14] over the last three years of its existence, but is seen outside the scope of research in this paper. Platform Mesenaatti. me Table 1: CF Platforms in Finland [14] Current Type Reward/Prepurchase/Presales Established & origin Autumn 2013, Finnish origin (Operates in Finnish mostly) [14]. Invesdor Equity Early 2013, Finnish origin (operates both Finnish & English) [29] [14]. Fundedbyme Fixura Equity/ Reward/Prepurchase/Presales Lending (peer to peer) Spring 2013 in Finland, Swedish origin (operates in English) [28] [14]. 2009 in Finland; Operates in Multiple languages (Open to borrowers from Finland & investors from Europe) [14].
Venture Bonsai Equity Earliest CF venture in Finland (2012). No success yet [14]. According to [23], the stages of an equity Crowdfunding process is divided into four stages as illustrated in Figure 1. However the same four stages are also applicable to other forms of Crowdfunding like reward, donation or lending. Major successful global CF platforms like Kickstarter, Indegogo and Sellaband who cater to specific markets also follow the same stages. The CF platforms specific to market in Finland like Mesenaatti.me, Invesdor and Fundedbyme also have the same process flow [14]. Plan submitted by Project owner Business Application to Platform Review of Plan & preparing pitch Assessment of response & funding window opens Funding window closes Success or failure Pitch Goes Live Funding Window Post Investment Figure1 Stages of Crowdfunding process Investors as advocates for the project Business Application to Platform The entrepreneur or project owner submits his/her plan to the CFP for review. The application form is usually referred to as a pitch [28]; [29] and consists of the business idea, plan, details of the financing the venture plans to achieve and specifically pre money evaluation and shareholders agreement details in case of equity CF, this is scrutinized by CFP and after discussions, changes and deliberation the project is published on the CFP website [14][28][29]. Pitch goes live According to Fundedbyme, project owners publish their work online and people sign up their interest; all this is termed as pre round. Project owners get all relevant data on crowd interest and then make a decision if they want to generate capital by going for an open round. Investors access through the material published by project owners, share their thoughts and the interaction develops during this stage (Collins & Pierrakis, 2012). The pitch stays live and is updated regularly even through the funding window as discussed below [14]. Funding window Pitches are usually on the CFP for a period of 60 to 120 days depending on the platform, in case of Invesdor it is 90 days. Funding campaigns usually are active between 5 to 10 weeks, with lending CF taking around five weeks, equity CF about eight weeks, and reward or donations taking about ten weeks [22]. During this period project owners market their project through the platform and the CFP also markets itself. The project owners in addition use their own marketing channels too [29]. The funding window can close for two reasons- (i) if the target is not reached even after stipulated days or (ii) If the target fund collection is reached within the period [23].The success or failure of the campaign is decided in this stage. If the target amount is achieved, the project owner is given the choice by CFP s to either continue the campaign for the entire period or stop the campaign. Post Investment- According to [23], even after the funding round, the interaction between investors and project owners would continue. Further, according to De Buysere et.al (2012), if a CF campaign is successful, most of investors will have post investment communication with the project owners. Especially in case of equity CF project owners evaluate investors and select the ones they would want as shareholders for variety of reasons. The investor money raised not accepted by the entrepreneur is transferred back to the investor by the CFP. In case of a failed campaign, that is minimum target is not achieved the CFP will transfer the money back to the investor. In most cases after this stage, the CFP is out of the loop and the interaction levels exist only between the investor and the project owner. 2. OBJECTIVES AND METHOD The objective of this research is to analyze the growth of Crowdfunding in Finland and also visualize the analytics in the process. In particular the study tries to answer the following research questions: 1. What is the current status of Crowdfunding in Finland? What do the numbers say? 2. What is the success vs failure rate? Does language play a role in determining this factor? 3. Is Crowdfunding just a big city phenomenon? Does the current data show the influence of minimum amount invested on the crowd in making an investment? By answering the above questions, an attempt has been made to visualize the state of Crowdfunding in Finland in terms of numbers, rather than just words. This paper is just a preliminary report based on the data gathered. The research involves in-depth analysis of literature published on Crowdfunding in Finland. Furthermore, in depth analysis of the three Crowdfunding service providers in Finland (mesenaatti.me, Invesdor and Fundedbyme) are carried out. The data collected is all available in public domain and the researcher just used the information available on the respective websites to make the analysis. 3. CROWDFUNDING IN FINLAND 3.1 Overview of Crowdfunding in Finland A detailed current analysis of Crowdfunding in Finland is shown in Figure 2, thus showcasing a clear domination of equity Crowdfunding over reward Crowdfunding. Reward or Donation Crowdfunding is running on a thin legal line in Finland, as Finnish laws prohibit fundraising via donations for individuals. Figure 2 Crowdfunding Equity vs. Reward Figure 2 clearly indicates the breakup of funds raised via Crowdfunding, with Invesdor clearly dominating the market raising over 2.1 million Euros of equity fundraising and Mesenaatti clearly dominating the reward based while raising 266K Euros. The numbers of campaigns on Invesdor were 43 with 5 of them ongoing currently while Mesenaatti had over 85 campaigns with 21 of them ongoing. Fundedbyme, the Swedish platform active in Finland, managed 10 campaigns out of which 4 were reward based and one ongoing campaign. Although Mesenaatti had the highest number of campaigns, all of them were reward based and targeted mostly arts and media projects, looking to raise an average of 2000 to 30,000 Euros per
project. Invesdor and Fundedbyme on the other hand attracted larger campaigns, with project owners looking to raise anywhere between 20,000 to 1,500,000 Euros, mostly by selling equity. 3.2 Success rate of the platforms The total expectation of the entrepreneurs is illustrated in Table 2, e.g. Campaigns on Invesdor were looking to raise over 4.2 million Euros and managed to achieve 2.1 million Euros with a success rate of 50% as compared to the other two which stood at 28%. However not all campaigns were successful with entrepreneurs on Invesdor taking 1.6 million of the total 2.1 million euros raised as shown in Figure 2. The high success rate of Invesdor could be attributed to one campaign that raised 770K euros, well over that expected target amount. Table 2: Target Euros achieved in Finland Platform Target Achieved % age achieved Fundedbyme 828000 237473 28.7% Invesdor 4214500 2117016 50.2% Mesenaatti 925704 266259 28.8% Table 3 gives an idea of the success rates of campaigns in Finland with an overall average of 19.5% with Invesdor leading the charts with 23% while having registered the highest amount raised as well. Table 3: Success Ratio in Finland over last year Platform # of Campaigns Successful % success Fundedbyme 10 2 20.0% Invesdor 43 10 23.3% Mesenaatti 85 13 15.3% The amounts raised by successful campaigns varied from 50,000 to 770K euros; hence in order to measure the success rate, the total campaigns were analyzed. While Invesdor had all equity campaigns, Fundedbyme showcased 4 reward based campaigns with none of them being successful. Messenaatti.me on the other hand had all 85 reward based campaigns with a success rate of 15%. There seems to be a strong link between the characteristics of the Crowdfunding platform, its team or origin and the amount raised. Finnish attitude of promoting localized services and understanding of Finnish specific fundraising laws acted as drivers for setting up of Finnish Crowdfunding Platform s [14]. The data clearly indicates that Finnish market prefers Invesdor for Equity CF and Mesenaatti for reward CF (both these having their origins in Finland) over Fundedbyme (which has a Swedish origin). The practical attributes could be the social network of the founders of the platforms in Finland, Invesdor and Mesenaatti having their main office in Helsinki, while Fundedbyme has just a country manager in Finland. However, the author at this point of time reframes from drawing any conclusion. 3.3 Advantage Equity Crowdfunding Crowdfunding in Finland is governed under strict fundraising laws wherein equity Crowdfunding is legally well defined under the current investor and shareholder laws, while reward Crowdfunding has its share of controversy. In order to run a Crowdfunding campaign in Finland one must be a registered company (i.e. no individual could ask for money like a donation). In addition to this while running a reward based campaign, the entrepreneur must be careful while marketing i.e. the rewards must be designed as a presale and not a donation (unless one is registered as a Ry-nonprofit organization). Therefore in order to avoid any controversies, the platforms encourage entrepreneurs to go for equity Crowdfunding over reward based. The detailed analysis of equity Crowdfunding is highlighted in Figure 3, which clearly shows the domination of Invesdor over Fundedbyme. Invesdor attracted over 759 investors with an average investment of 2789 Euros per investor while Fundedbyme managed to attract 147 investors with an average of 1600 Euros per investor. Invesdor has 5 equity campaigns ongoing currently, with Fundedbyme having zero equity campaigns currently. Fundedbyme however is going strong in Sweden, with its own campaign, wherein it managed to raise to over 660K euros while attracting investors from Finland too. Figure 3 Equity Crowdfunding in Finland Furthermore, the equity Crowdfunding data was analysed down to city level in Finland. Figure 4 Demographics of Finland 3.4 Crowd behavior Table 4: Success Ratio vs. Language (Equity) # of Campaigns English Finnish Total 34 10 Successful 8 4 % age success 19.0% 28.6% Table 5: Crowd Investors (Range of Investment per Campaign)
Successful Equity Campaigns Average Max Min Invesdor 18610 2909 159927 8764 615 Fundedbyme 2417 1786 632 Table 6: Crowd Investors (Effect of Minimum Investment) Min Investment (Range Euros) # of Campaigns Number of Investors Amount Invested <100 Euros 10 260 363944 100 to 250 14 230 338028 250 to 500 11 224 1359538 500 to 1000 5 44 45518 1000 to 3000 2 1 9988 3000 and above 1 0 0 Figure 5 Crowd Investors Visualisation 4. CONCLUSIONS 4.1 Conclusion for the paper 4.2 Scope of Future work Understanding of Finnish laws is the key to run a CF campaign and educating the Finns is the biggest challenge Crowdfunding Platform s currently face in Finland [14]. Investment flow in a Crowdfunding campaign The practical functioning of a Crowdfunding process was showcased earlier. The need for sharing of information on the project and regular updates to motivate the crowd to invest forms the highlight in all the stages. In this section we focus on the pattern of funding over the duration of campaign and the possible factors influencing this. A study by Ordanini et.al (2011) on three Crowdfunding platforms suggested a similar pattern of cumulative investment flow during a CF campaign as illustrated in Figure 24. They state that regardless of the differences in the required investment size per participant, the overall investment path, reflecting the collective investment behavior of consumers over time, seems to follow a similar pattern in all three cases. The pattern has been showcased in Figure 23, with cumulative investment flow on Y axis and duration of time on the X axis. Investment Phase1 : Friends & Family Engagement or Critical Moment Phase 2 : Getting the Crowd Phase 3 : race to be in Time Figure23 Pattern of crowd investment (Ordanini et.al, 2011) The first phase is termed as friend funding by Ordanini et.al (2011) and is seen to have quick and rapid increasing trajectory, thus suggesting steady flow of investment in a very short time. They also state that this investment on an average covers almost half the target to be achieved through CF. The rapid flow of finance is from the sources closely linked to the project owners. Furthermore, according to Mollick (2012), in addition to quality of the project (brand theory), the social network of project owners are linked directly to the success of a CF campaign. According to his study on Kickstarter, a project owner with 10 Facebook had a success rate of 9%, one with 100 friends had a 20% success rate and one with 1000 friends had a 40% success rate. Therefore the larger the social network, faster is the flow of investment in the first phase. The second phase termed getting the crowd is associated with investment flow slowing down and almost stagnating at the end. According to Ordanini et.al (2011) the project owners have to assume huge responsibility in this stage to keep the campaign afloat. They also state that projects usually stagnate in this stage for failing to ignite the crowding process, with Mollick (2012) directly correlating the length of duration to the failure. Attracting the crowd outside the direct social network through marketing, advertising and word of mouth communication and motivating them to invest is the key to success. Only few projects reach the engagement moment highlighted in Figure 24 and start the third phase termed as race to be in (Ordanini et.al, 2011; Berglin & Strandberg, 2013). In this phase the project catches steam and sees accumulation of investment at a very rapid pace and according to Berglin & Strandberg (2013) usually exceed the target. Ordanini et.al (2011) further states that the crowd funders are people outside the social network of the project owners and invest at the end of the funding window. The funders act similar to investors in financial markets (Ordanini et.al, 2011; Berglin & Strandberg, 2013) who do not want to miss an opportunity to be part of the project. This section established the pattern of flow of investment in a CF process. It also reiterated the importance of marketing, social network and quality of product to the success of the CF campaign. Moreover, the literature study along with market analysis highlight a fact that CF process in Finland is similar to rest of the world. However the pattern of flow of investment is too early to compare as CF in Finland is just a new phenomenon.
REFERENCES [2] CNBC (2013), Global Crowdfunding Surges 81 percent in 2012: Survey. Published: Monday, 8 Apr 2013. http://www.cnbc.com/id/100624487 (Retrieved on 10th July 2013). [4] Ellenoff (2012). CF Industry report, Market Trends, Composition and Crowdfunding Platforms, http://www.crowdfunding.nl/wp- content/uploads/2012/05/92834651-massolution-abridged-crowd- Funding-Industry-Report1.pdf [14] Lasrado, L A (2013). Crowdfunding in Finland A New Alternative Disruptive Funding Instrument for Businesses. Master Thesis. Business and Technology. Tampere University of Technology. [22] De Buysere, K. Gajda, O. Kleverlaan, R. Marom, D (2012). A Framework for European Crowdfunding. 1st ed., 2012, ISBN 978-3-00-040193-0. http://www.crowdfundingframework.eu/index.html (Retrieved on 10th July 2013). [23] Collins, L and Pierrakis, Y (2012). THE VENTURE CROWD Crowdfunding equity investment into business. wwww.nesta.org.uk. Nesta 2012. [28] Fundedbyme (2013). How it works. https://www.fundedbyme.com/en/equity/about-us/ (Retrieved on 10th August 2013). [29] Invesdor (2013). How does Crowdfunding work with Invesdor https://www.invesdor.com/en/how-it-works (Retrieved on 10th August 2013).