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  • Issue 4 December 2015

    CASI: Project description

    PROJECT TITLE: Public Participation in Developing a Common Framework for Assessment and Management of Sustainable Innovation (CASI)

    COORDINATOR: ARC Fund, Bulgaria: Zoya Damianova.

    CONSORTIUM: The CASI consortium consists of 19 partners representing 12 European countries. Country correspondents extend the reach to all EU-28 countries.

    FUNDING SCHEME: Coordination and support action, funded under the 7th Framework Programme of the European Community, SCIENCE-IN-SOCIETY-2013.1.2

    Crowdfunding in Sustainable Innovation

    Insights from and for Germany

    INNOVATION TAKE UP AND FINANCING

    The take up of innovative services and products has contributed to creative thinking also in new sources of financing. Innovation processes are characterised by constant development, and it is beneficial if models of financing can be aligned to that. Crowdfunding, i.e. collecting finance from publics, has emerged as a new alternative also in the field of sustainable innovation. Crowdfunding is particularly interesting for Small and Medium size companies (SME’s) looking for financing when their product or service is not considered quite ready for investments.

    CROWDFUNDING FOR SME’S

    Crowdfunding may respond to SME’s needs in the absence of bank finance, venture capital or initial public offerings (IPO). Crowdfunding could contribute to bridging the finance gap for small firms and innovative projects, provide better access to finance for small businesses and promote entrepreneurship towards growth and job creation.

    GROWING POTENTIAL AND NUMEROUS PLATFORMS

    Crowdfunding is a large and rapidly growing business, with a volume of 16.2b$ in 2014 which is estimated to double to 34.4b$ in 2015 (Massolution 2015). Investments in Europe are estimated at 945 m€ across hundreds of platforms. Prevalent practices in crowdfunding and popular crowdfunding sites with programmes for sustainable innovation (cf. Crowdfunding.com 2015) provide alternatives to Commission funding schemes such as COSME (planned budget of 2.3b€ for 2014-2020) and Horizon 2020’s SME instrument (about 3 b€ for 2014-2020).

    CROWDFUNDING AS A SERIOUS ALTERNATIVE

    This policy brief looks at how crowdfunding relates to sustainable innovation. It introduces crowdfunding as an activity, discusses it in relation to sustainable innovation and looks at the development of crowdfunding in Germany. This policy brief looks at crowdfunding from several levels: strategic, programmatic and operational case level.

    CROWDFUNDING IN GERMANY

    Concerning Germany attention should be paid to the lowering of regulation, the involvement of crowdfunding within the classic banking service and the appreciation of engagement with a new culture of financial participation.

    The CASI project has received funding from the European Union’s Seventh Framework Programme for research, technological development and demonstration under grant

    agreement no 612113

  • CASI POLICY BRIEF Issue 4

    The CASI project has received funding from the European Union’s Seventh Framework Programme for research, technological development and demonstration under grant agreement no 612113

    Introduction

    NEW SOURCES OF FINANCING ON THE RISE

    The processes of innovative service and product development are characterised by constant evolution, and it would be beneficial if models of financing can be aligned to that. Crowdfunding, i.e. collecting finance from the public, has emerged as a new alternative also in the field of sustainable innovation. Crowdfunding is particularly interesting for Small and Medium size companies (SME’s) looking for financing when their product or service is not considered quite ready for investments, which shows the limits of private equity (PE) and venture capital (VC) schemes.

    ALTERNATIVE TYPES OF FINANCING ARE ENDORSED BY THE EUROPEAN COMMISSION

    The European Commission has during the last 30 years built paths towards research excellence through different Framework Programmes that further strengthen crossborder cooperation. These synergies have led to the convergence of the objectives of the two, with the solutions of Europe’s societal challenges delivered through the current Horizon 2020 Programme. Bank loans, hybrid and mezzanine, grants, PE and VC – and crowdfunding – complement financing innovation in Europe. Indeed, the European Commission supports and endorses alternative types of financing and is making an effort towards establishing the environment, conditions and the policy framework, in which the envisioned measures would succeed in improving the access to finance for R&I projects and further strengthening of innovation-driven SME ecosystem and the value chain.

    CROWDFUNDING FOR SME’S

    In the context of SME’s finance value chain, crowdfunding may respond to their needs in the absence of bank finance, venture capital or initial public offerings (IPO). Crowdfunding could contribute to bridging the finance gap for small firms and innovative projects, provide better access to finance for small businesses and promote entrepreneurship towards growth and job creation.

    CROWDFUNDING MODELS

    Typically, a crowdfunding project is initiated on an internet platform, which supports the main mechanism of crowdfunding: collecting funds from a large number of contributors, online investors, sponsors or donors to fund for-profit or non-profit initiatives or enterprises. Crowdfunding raises capital for new projects and businesses by soliciting contributions from a large number of stakeholders following three main types of crowdfunding models: (1) donations, philanthropy and sponsorship, where there is no expected financial return, (2) lending and (3) investment in exchange for equity, profit or revenue sharing.

    CROWDFUNDING AS A SERIOUS ALTERNATIVE

    This policy brief looks at how crowdfunding relates to sustainable innovation funding activities. It introduces crowdfunding as an activity, discusses it in relation to sustainable innovation and looks at the development of crowdfunding. This policy brief looks at crowdfunding from several levels: strategic, programmatic and operational case level.

  • CASI POLICY BRIEF December 2015

    The CASI project has received funding from the European Union’s Seventh Framework Programme for research, technological development and demonstration under grant agreement no 612113

    OVERALL PICTURE

    Crowdfunding in Germany

    Successful crowdfunding projects in the past introduced new technological inventions, social projects and also film production in Germany. One of the most famous crowdfunding projects in Germany, which also made a lot of people familiar with this form of investment and financing, is the Stromberg feature film. One million € were raised for its production in less than one week during December 2011.

    THE DEVELOPMENT OF THE CROWDFUNDING MARKET

    The Crowdfunding market in Germany started around 2006. From 2012 to 2014 236 million € were raised in the alternative finance market. The average growth rate of 113% in this period shows that the alternative finance market is growing in Germany. Compared to Europe (excluding the UK, as they are very successful with crowdfunding), the German growth rate is average. From 2012 to 2014 236 million €, in 2014 140 million € and during the first quarter of 2015 - 49 million € have been invested in crowdfunding projects in Germany [4: 13, 28].

    EXAMPLES FOR SUCESSFUL CROWDFUNDING

    There are large scale projects like the construction of an offshore wind farm 16 km off the coast of Mecklenburg-Vorpommern, 49% of it supported through 19 municipal utilities. Another interesting aspect is that a lot of long term projects decide to set up a registered cooperative company like the ’Bio Boden Genossenschaft’. The aim of this initiative is to expand the organic cultivation areas in Germany. Like these examples already illustrate there are quite a few crowdfunding projects with a sustainability background. Some of them are about development assistance, for example the installation of a solar drip irrigation system in Tanzania or mobile solar collectors in Mali. While talking about energy efficiency a lot of companies are replacing their conventional lightning with energy-efficient lightning with the help of crowdinvesting. Smaller-scale projects often collect money for camps, education projects or renovation work. Some companies for example collect money on crowdfunding platforms to change the conventional lightning to LED lightning, which saves a lot of energy and is more sustainable.

    NEW LEGAL REGULATIONS

    The latest change for the crowdfunding market is a revision of the Retail Investor Protection Act which the federal government has adopted in July 2015. Before the revision of this law there was no required legal certainty for investors or founders. Misuse of crowdfunding platforms could easily happen. There was a need for a new law that would balance two aspects: limiting and managing the risks for small investors and not making the crowdfunding market less accessible.

  • CASI POLICY BRIEF Issue 4

    The CASI project has received funding from the European Union’s Seventh Framework Programme for research, technological development and demonstration under grant agreement no 612113

    IDEA OF REGULATION TO ENLARGE CROWDFUNDING

    RISK MANAGEMENT THROUGH THE RETAIL INVESTOR PROTECTION ACT

    The new draft of the THE RETAIL INVESTOR PROTECTION ACT is supposed to protect small investors from suspect financial products and it contains regulations for the gray capita