Alternative finance for research and innovation: challenges of platforms and how to address them
The Study “Assessing the potential for crowdfunding and other forms of alternative finance (AF) to support research and innovation” has just been released. It highlights the market state of play, challenges and opportunities for platforms of alternative finance (AF) for research and innovation. Below short summary of main findings.
Overview of AF platforms’ market
The AF market is highly competitive, with a clear advantage for the first-comers. Although the number of active platforms has been growing over the years, the number of platforms founded in a specific year has been steadily decreasing since 2014.
The majority of AF R&I platforms are autonomous, profit-oriented companies (73% of surveyed platforms). Yet most of the platforms are relatively small with a turnover below EUR 500 thousand (78% of surveyed platforms) and, in particular, research oriented platforms have a problem in finding a sustainable business model.
The majority of the AF platforms adopt equity funding models (over 50%) followed by hybrid funding models (24% of platforms). The major distinctive categories of R&I-oriented platforms include: renewable energy and energy efficiency 32.5%); innovation, start-ups and SMEs (32.5%); health & life sciences (12.5%).
Project feasibility and economic impact are the main factors taken into account by platforms when selecting R&I projects. R&I-oriented platforms perform a pre-quality check of projects before listing them (usually through a scientific or advisory board, and according to a set of quality criteria), although there is no standard approach (it differs among platforms, funding models, area and degree of specialisation of AF platforms).
Key challenges of AF platforms are:
- Platform specific: profitable business model, network for crowd engagement, managing return expectations of investors, transparency around investors, crowd liquidity, gaining the trust of investors.
- Country specific: development of AF platforms is correlated with the maturity of alternative finance market, availability of AF, cultural readiness and the existence of support measures, as well as lack of impediments.
- Cross-border: regulatory fragmentation at EU level and the existence of different regulatory regimes amongst countries.
Some of identified solutions addressing these challenges are:
Facilitating cross-border business
- Developing guidelines on cross border investments for platforms, and platforms for R&I, to enhance the understanding of different regulatory and legislative regimes.
Addressing transparency of platforms´ operations
- Facilitating the creation and promotion of the Code of Conduct for AF platforms. The EU system of self-regulation could strengthen trust between the stakeholders of the ecosystem.
- Promoting standardisation in the way results from AF campaigns are reported (Key Performance Indicators) and quality criteria (check-list) for the selection process of projects by AF platforms.
Quality endorsement of R&I platforms
- Creating an open repository of science-related platforms based on the set of specific preset criteria, e.g. platforms should be active and have active projects, they should commit to the Code of Conduct and standardised reporting.
EU-matching funds for innovation projects
- There is a potential for EU matching funds gathered through crowdfunding platforms. Platforms specialised in the field could pre-select projects which, after reaching a specific level of funding from the “crowd” / professional investors, would receive the remaining part from EU funds. In practice, that would mean that the EU would commit to contributing a certain percentage of the pledged amount (platforms mention 30% of a total sum pledged) or a certain sum from the start, up to a specific agreed level. Only after reaching this level, the EC would contribute.