Opinion

Crowdfunding: Broadening Europe’s capital markets

The rising financing gap for SMEs as well as high growth firms is a serious concern for Europe battered by financial fragility. These firms, particularly young innovative firms, are the drivers of job creation and economic growth, much needed to break through the economic malaise across Europe.

By: Date: October 29, 2014 Topic: Digital economy and innovation

Source: OECD (2013a), STI Scoreboard 2013

Note: Figures refer to the preliminary results of the OECD DYNEMP project based on data from Austria, Belgium, Brazil, Finland, France, Hungary, Italy, Japan, Luxembourg, the Netherlands, New Zealand, Norway, Spain, Sweden and the United States.

In the U.S., the majority (70%, according to IRSG) of corporate fundraising is through the securities market while in Europe, companies have traditionally relied on bank lending.

The curtailing of bank lending over the past several years due to the financial crisis has created a huge constraint for these firms, particularly as non-bank capital is less prevalent in Europe. In the U.S., the majority (70%, according to IRSG) of corporate fundraising is through the securities market while in Europe, companies have traditionally relied on bank lending.

Source: World Economic Forum (2012), The Global Competitiveness Report 2012-2013 and World Economic Forum (2008), Schwab, K. (2012), The Global Competitiveness Report 2012–13. Geneva: World Economic Forum. Schwab, K. (2009), The Global Competitiveness Report 2008–09.

Note: Scale from 1 to 7 from hardest to easiest, weighted averages.

At a time when banking intermediation is under pressure, it is important for European Union policymakers to further explore alternative forms of financial intermediation. Commission President Jean-Claude Juncker recently spoke about the need to improve financing in Europe by “further developing and integrating capital markets” and reducing the dependence on bank funding. He and his new team should address regulatory fragmentation in financial markets head on in order to facilitate efficient funding and growth of innovation in Europe.

For innovative young firms, equity capital can be particularly important to fuel growth across borders, yet the European capital markets are highly fragmented making it difficult for these firms to access the necessary financing. Different rules and regulations apply to various types of financial instruments and financial intermediaries across European countries.  Financial intermediation plays a critical role for young firms as information asymmetries make it difficult for investors to identify and evaluate the potential of these firms.

Venture capital and angel investment are playing an increasingly important role in Europe but activity is still overshadowed by the U.S. where the capital markets are more developed.

Source: OECD (2013), Science, Technology and Industry Scoreboard 2013, calculations based on PwCMoneyTree, EVCA/Thomson Reuters/PwC and EVCA/PEREP_Analytics.

Note: Data for the United States refer to market statistics, data for Europe refer to industry statistics. Europe includes here Austria, Belgium, Bosnia-Herzegovina, Bulgaria, Croatia, Czech Republic, Denmark, Estonia, Finland, France, Germany, Greece, Hungary, Ireland, Italy, Latvia, Lithuania, Luxembourg, Former Yugoslav Republic of Macedonia, Montenegro, Netherlands, Norway, Poland, Portugal, Romania, Serbia, Spain, Slovak Republic, Slovenia, Sweden, Switzerland, Ukraine and United Kingdom.

Over the past decade, European venture capital investment has been approximately one-fifth to one-third the size of investment in United States but this figure has dropped further in recent years. Also, the number of venture capital deals in Europe is higher than in the United States, showing that venture capital firms in Europe are, on average, dispersing funds more broadly through smaller deals. In fact, according to the data above, deals in the United States have been on average almost double the size of European deals.

Angel investment has been playing an increasingly important role in the financing innovative young firms but remains primarily local due to the fact that the majority of angel investments are made individually to entrepreneurs within the investors’ communities. A growing number of angel investors are investing through groups, networks and syndicates but the majority of these investments also remain local or national.

As analysed in a paper just published by Bruegel, Crowdfunding is increasingly attracting attention, most recently for its potential to provide equity funding to start-ups.

Source: Bruegel elaboration on the basis of crowdfunding industry report 2013 (Massolution).

Equity crowdfunding can open up additional channels for new ventures to access finance at a time when securing funding is difficult, however, policy makers should carefully assess the risks of this new financial intermediation tool. The challenges that equity crowdfunding poses are distinct and more complex than those of the other forms of crowdfunding and the risks also differ from other forms of seed and early stage equity finance, such as angel investment and venture capital. Unlike other forms of equity financing, crowdfunding is intermediated by online platforms. These platforms differ in terms of the role they play in screening and evaluating companies. Also, their role during the investment and post-investment stages can vary dramatically.

Due to exemptions in legislations, Europe has been at the forefront of equity crowdfunding globally. However, the market is highly deregulated with few legal protections provided to funders.  In response, some member states have introduced ad hoc legislations for crowdfunding, while some others will introduce new laws soon. Being internet based, equity crowdfunding has the potential to contribute to a pan-European seed and early stage financial market to support European start-ups. However, in order to maximise this benefit, policies to address equity crowdfunding models should be adopted homogeneously by all member states. This approach would maximise the benefits of equity crowdfunding and help to reduce the risks. It would also help to address some of the fragmentation in Europe’s financing markets and encourage new forms of financial intermediation. The Commission should work with Member States to address the current patch-work of national legal frameworks which constitute an obstacle to the appropriate development of this nascent model of funding across Europe as part of the work towards a Capital Market Union.

 

 


Republishing and referencing

Bruegel considers itself a public good and takes no institutional standpoint.

Due to copyright agreements we ask that you kindly email request to republish opinions that have appeared in print to [email protected].

Read about event More on this topic
 

Upcoming Event

Jun
23
14:00

BRI 2.0: How has the pandemic influenced China’s landmark Belt and Road Initiative?

China's Belt and Road Initiative is undergoing a transformation after two years of pandemic. How is it changing and what are the consequences for Europe.

Speakers: Alessia Amighini, Eyck Freymann and Alicia García-Herrero Topic: Global economy and trade Location: Bruegel, Rue de la Charité 33, 1210 Brussels
Read article More by this author
 

Blog Post

Owning up to sustainability risks: the EU should champion international standards

To keep European Union capital markets open and integrated, new international standards should be reflected in future European law and accounting practice to provide further incentives for a reallocation of capital, reflecting in particular climate risks.

By: Alexander Lehmann Topic: Banking and capital markets, Green economy Date: April 26, 2022
Read article Download PDF More on this topic
 

Working Paper

The low productivity of European firms: how can policies enhance the allocation of resources?

A summary of the most important policy lessons from research undertaken in the MICROPROD project work package 4, related to the allocation of the factors of production, with a special focus on the weak dynamism of European small and medium-sized enterprises (SMEs).

By: Grégory Claeys, Marie Le Mouel and Giovanni Sgaravatti Topic: Macroeconomic policy Date: April 25, 2022
Read article Download PDF More on this topic
 

Working Paper

Knowledge flows and global value chains

Trade and industrial policy can support productivity growth through global value chains by providing the right legal environment that supports the formation of longterm business relationships.

By: Marta Bisztray and Niclas Poitiers Topic: Global economy and trade Date: April 13, 2022
Read article More on this topic
 

Blog Post

Is the private sector retreating in China? Not among its largest companies

Though private ownership does not free companies from the pervasive influence of the Communist Party, China’s private and state sectors are not equivalent; China’s largest firms are growing faster than their state-owned counterparts.

By: Tianlei Huang and Nicolas Véron Topic: Global economy and trade Date: April 5, 2022
Read article Download PDF More on this topic
 

Working Paper

The private sector advances in China: The evolving ownership structures of the largest companies in the Xi Jinping era

This paper documents recent structural changes in China’s corporate landscape, based on company level data, providing a complementary perspective to that of official Chinese statistics.

By: Tianlei Huang and Nicolas Véron Topic: Global economy and trade Date: April 5, 2022
Read about event More on this topic
 

Past Event

Past Event

Macroeconomic and financial stability in changing times: conversation with Andrew Bailey

Guntram Wolff will be joined in conversation by Andrew Bailey, Governor of the Bank of England.

Speakers: Andrew Bailey and Guntram B. Wolff Topic: Macroeconomic policy Date: March 28, 2022
Read article More on this topic More by this author
 

Parliamentary Testimony

House of Lords

UK energy supply and investment

Testimony before the Economic Affairs Committee at the House of Lords, UK Parliament.

By: Simone Tagliapietra Topic: House of Lords Date: March 23, 2022
Read article More on this topic More by this author
 

Podcast

Podcast

War in Ukraine: implications for the global financial system and central banks

A special episode of the Sound of Economics Live on the global financial system and central banks in the wake of sanctions imposed on Russia.

By: The Sound of Economics Topic: Banking and capital markets Date: March 2, 2022
Read about event More on this topic
 

Past Event

Past Event

War in Ukraine: implications for the global financial system and central banks

A special episode of the Sound of Economics Live on the global financial system and central banks in the wake of sanctions imposed on Russia.

Speakers: Silvia Merler, Giuseppe Porcaro and Nicolas Véron Topic: Banking and capital markets Location: Bruegel, Rue de la Charité 33, 1210 Brussels Date: March 2, 2022
Read about event More on this topic
 

Past Event

Past Event

Greening Europe’s post-Covid-19 recovery

At this event Bruegel launches a new Blueprint that collects voices of policymakers and academics on the crucial topic of how to make sure Europe will recover from the pandemic crisis while keeping their commitments to the Paris Agreement.

Speakers: Ian Parry, Simone Tagliapietra, Laurence Tubiana and Guntram B. Wolff Topic: Green economy Date: February 24, 2022
Read article More on this topic More by this author
 

Opinion

Will this be the century of youthful Asia?

Youthful Asia offers immense opportunities for investors, but this potential can only be realised if their infrastructure and energy needs are fulfilled.

By: Alicia García-Herrero Topic: Global economy and trade Date: February 18, 2022
Load more posts