Paris - When Vincent and Heloise opened a mash eatery in
Strasbourg, they had a feeling their unusual concept could thrive elsewhere in
France. But one thing was painfully missing: cash.
Like more and more budding entrepreneurs in Europe, the pair
of trained engineers turned to individuals, not banks, to help their business
sprout and one day open a venue in Paris.
At this self-service food bar, customers scoop from a
colourful display of mashed vegetables, all seasonal, local and organic. They
top them with sausage, tofu or another protein, and some gravy.
This is "a new generation of fast food: still fast, but
good", said Vincent Viaud, 26, co-founder of Pur et Caetera.
Friends and family supported the idea, but that was it.
"Our bank had been straightforward, saying it wouldn't
lend to us before we'd been in business for two or three years," Viaud
told Reuters. "Seed capital is really what's missing."
As European banks keep tight control on lending and
investors face poor returns on their savings while financial markets are still
jittery from the region's debt crisis, cash-hungry companies are increasingly
turning to an alternative form of financing known as crowdfunding.
This involves a number of small investors pooling together
online to raise a targeted sum, whether through donations, loans or equity
According to a report on the industry by research firm
Massolution, crowdfunding platforms raised nearly $1.5bn in 2011, almost twice
the amount as in 2010, successfully funding more than a million campaigns
around the world.
Total funding is expected to double again this year, driven
by North America and the brisk growth in equity-raising campaigns such as those
featured by European leader SeedUps and UK-based Crowdcube, where investors can
buy stakes in the company they believe could become the next big thing.
European Central Bank data showed, meanwhile, that growth in
bank loans to the private sector slowed to an annual 0.6% in March, down from
0.8% in February. This was despite moves by the European Central Bank to flood
the eurozone's banking sector with more than €1 trillion of cheap three-year
Pur et Caetera collected €97 000 ($127 200) in the past three
months on French crowdfunding platform Wiseed, prompting a string of comments
from potential investors, themselves often executives with a knack for
management and strategy.
"We liked the idea of participative funding from small
investors. It's in keeping with how we work directly with producers," said
Viaud. "And it'’s very constructive - beyond financial support, they bring
us experience and advice."
Alain Renaud, 69, told Reuters he pledged €20 000 to the
business and spoke several times a week with the managers to help them drive
the company's take-off.
"I'm not interested in being a passive investor,
patiently waiting for them to make a profit, I want to coach and mentor them to
help them get there," said Renaud, a former sales manager with two decades
of experience in venture capital.
He already convinced a friend working in the food industry
to invest in Pur et Caetera and help it open up franchises.
"It's what we call 'smart money': when investors bring
added value - a network, advice, not just money," Renaud said.
Finding an audience
Entrepreneurs seeking funds to push through what may be
still fuzzy business ideas can turn to peer-to-peer lending platforms such as
British leaders Zopa and FundingCircle, or Germany's Smava.
Such websites offer lower financing costs than banks and
generally do not require a detailed business plan, in contrast to most
Investors, on the other hand, are attracted by higher
returns and the opportunity to directly manage their stakes.
"People want to see their money invested in businesses
that they understand and that they choose," said Jean-Christophe Capelli,
chief executive of crowdfunding site FriendsClear. "They take on the role
of the credit committee, and only the most popular projects get funded."
On donation platforms, best known for supporting independent
musicians and film makers, project backers do not even expect any financial
returns on their investments.
According to Massolution, such donation-based sites account
for more than half of the funds raised by crowdfunding platforms worldwide. The
average sum raised, usually less than $5 000, is comparable to that of peer-to-peer
lending sites, whereas funds for equity-based projects average $85 000.
Project backers usually have small perks in return for their
donations, such as a first edition release or their name in the credits at the
end of a film, and are invited to comment on the project.
"It's an extraordinary way of getting feedback on your
product. People vote with their dollars, so you can test the water before
jumping into it," said Olivier Mevel, co-founder of ReaDIYmate, which
sells kits to build toys and gadgets that you can control with a mobile phone
or over the internet.
Mevel raised more than $27 000 on US-based Kickstarter, the
world's number one donation-based crowdfunding platform. His team, which had
sought an international audience to test the product, found that European
crowdfunding platforms were still too small and fragmented.
Spreading the gospel
Since its launch four years ago, Kickstarter has raised
around $200m, funding more than 20 000 projects.
In comparison, French-born Ulule.com - which is developing
in six languages and uses PayPal and Leetchi to handle payments to comply with
banking regulations throughout Europe - has raised about €2m for 800 projects.
Its peer, KissKissBankBank, raised about €1m last year, up
from €200 000 in 2010.
"It's accelerating, but we still don't see exponential
growth like in the US. We're still spreading the gospel," KissKissBankBank
CEO Vincent Ricordeau told Reuters.
He highlighted language and legal barriers between
countries, along with a less favourable cultural context for philanthropy and
entrepreneurship than in North America.
"Here, people tend to consider that since they pay a
lot of taxes, it's up to the state to support the cultural industry,"
In a bid to promote a more favourable framework for
crowdfunding on the Old Continent, the newly-born European Crowdfunding Network
(ECN) is looking to gather prospective founding members next month in Brussels.
"We need to harmonise the landscape in Europe because
platforms, to be profitable, need to have a large enough market to grow
in," said Eva Serlachius, one of ECN's ambassadors.
For now, in order to be compliant with financial and banking
regulations, platforms usually negotiate with national regulators and are
granted exemptions on a case-by-case basis.
Among the regulatory hurdles highlighted by crowdfunding
advocates is the limit many European countries put on the value of securities a
company can offer individual investors without having to publish a detailed -
and costly - prospectus.
In the US, the JOBS Act signed into law last month allows
entrepreneurs to raise up to $1m online from individual investors with minimal
financial disclosure. While obtaining large bipartisan support, the bill has
raised concerns that crowdfunding might lead to financial scams.
"To go down a completely deregulated route is dangerous
given the opportunities there are to create a fake platform with a pyramid
scheme or a fake investment opportunity," said Chris Puttick, co-chair of
the European Crowdfunding Association (ECA), which aims to create an industry
trade organisation with membership criteria "before there's a
Meanwhile, crowdfunding players are calling for
self-regulation and common sense.
"We clearly state that investments are risky and tell
people that their capital is not guaranteed," said Thierry Merquiol,
co-founder of Wiseed, where individuals on average invest €1 600 in a project
with the hope of selling their stake at a profit a few years later.
"We don't stop people from going to slot machines and
spending €2 000 a night," Merquiol quipped.