Crowdfunding is the practice of funding a project or a venture by raising small amounts of money from a large number of people, typically via the Internet. Crowdfunding can be an alternative way to raise money to finance projects, start-up businesses or charitable initiatives.1 Cambridge Centre for Alternative Finance, 2019
From 2017 to 2018, Europe saw a 95% growth in the amount of money mobilised through crowdfunding, from a total volume of around EUR 3.45 billion to EUR 6.44 billion. In 2018, there were between 600-800 crowdfunding platforms operating in Europe, with the majority concentrated in Western Europe (e.g. 89 in UK, 63 in Germany, 51 in France and Italy, 45 in the Netherlands and 39 in Spain.)2Wenzlaff K., Odorović A., Ziegler T., Shneor R. (2020) Crowdfunding in Europe: Between Fragmentation and Harmonization. In: Shneor R., Zhao L., Flåten BT. (eds) Advances in Crowdfunding. Palgrave Macmillan, Cham. & CrowdfundingHub (2021). Current State of Crowdfunding in Europe During the global COVID-19 pandemic, leaders in the European crowdfunding market – France and Germany – increased their crowdfunding market value and others (e.g., Italy, Norway) demonstrated good market performance as well.
The use of crowdfunding is unequally distributed across EU Member States, and, until recently, cross-border crowdfunding was difficult due to fragmented crowdfunding regulation. The European Crowdfunding Service Provider Regulation (ECSP) came into force at the end of 2020.3European Commission, Crowdfunding, Europa.eu It outlines a single set of rules applied throughout the EU, to be supervised by each Member State, and further protects investors and allows crowdfunding to operate cross borders.
Types of crowdfunding 8M., Renwick, E., Mossialos, ‘Crowdfunding Our Health: Economic Risks and Benefits’ Social Sciences & Medicine 191 (48-56), 2017
Donation-based crowdfunding - Individuals donate small amounts to meet the larger funding aim of a specific charitable project while receiving no financial or material return, i.e. donating to a charity marathon.
Rewards based crowdfunding – Investors donate to project/business with the expectation of receiving non-financial rewards such as goods/services at a later stage in exchange for their contribution.
Equity crowdfunding - Investors receive shares of the business or company in return for their investment. This works similarly to how common stock is bought or sold on stock exchange, or venture capital.
Peer to peer lending – The crowd lends money to a company with the understanding that money will be repaid with interest. The amount of interest is established by the company that needs financing before the lender gives them money. This is similar to traditional bank borrowing, except it is borrowing from lots of investors.
Real estate crowdfunding – Providing funding for property investments, either with loans or equity.
Crowdfunding campaigns in health tend to be donation- or reward-based and used for the development of new medical devices or to cover the costs of expensive personal healthcare (e.g. rare cancer treatment). They are not usually focused on public health. For example, in 2021 the European Institute of Innovation and Technology (EIT-Health) launched the first pan-European crowdfunding platform, exclusively dedicated to promising start-ups or SMEs in the health sector.
However, there are some grassroots crowdfunding campaigns which aim to improve health and wellbeing in the community, developed by various actors and uploaded onto crowdfunding platforms like Kisskissbankbank or Just Giving. Those campaigns range from supporting victims of domestic violence, developing a mobile application helping individuals to lose weight, installing a gym, or building a shower facility for the homeless.
Benefits of crowdfunding
Innovative way of sourcing funding for new projects: Crowdfunding can be a way of cultivating community and generating resources for new projects; social concerns, issues or movements.
Easier for organisations and community services: Organisations have to meet fewer requirements to receive funds from crowdfunding platforms as compared to the traditional banking system.
Increases participation in the health and social services market: It provides an easier way to access alternative funds with reduced bureaucracy, which can improve financial support to individuals, organisations & small-medium enterprises (SMEs).
Draws funding and awareness towards neglected areas: Crowdfunding is often used to fund social needs of the community (e.g., establishing a gym, acquiring equipment for certain social services, etc.)
Improved social engagement: The most successful crowdfunding projects provide regular updates.4M., Renwick, E., Mossialos, ‘Crowdfunding Our Health: Economic Risks and Benefits’ Social Sciences & Medicine 191 (48-56), 2017. This creates transparency and social engagement, where the funders can see how the project is progressing, possibly provide input and monitor the project's practices.
Tax incentives: Possible tax incentives would reward investments in newly created social enterprises (though this will depend on national regulations).
Risks of crowdfunding
Not meeting the crowdfunding target: There is a risk of not reaching the set fundraising target. In some cases, this will result in all collected money being returned to donors/investors. Setting unrealistic expectations can result in delays, which can damage the reputation of the entity seeking crowdfunding.
Inefficient priority setting: Social media advertising of crowdfunding campaigns relies on the ability to tap into social networks and public support, which may prioritise emotive short-term crisis campaigns, rather than long term, preventative projects.
Accountability, transparency & due diligence issues: The anonymity of donators and project initiators, geographic distance, and information asymmetry between funders and project initiators makes it challenging to ensure accountability, transparency, and due diligence across all projects.
Intellectual property rights: Crowdfunded health and biotechnology start-ups are at risk for having their intellectual property stolen or plagiarised .5M., Renwick, E., Mossialos, ‘Crowdfunding Our Health: Economic Risks and Benefits’ Social Sciences & Medicine 191 (48-56), 2017.
Risk of fraud & laundering: The anonymity of crowdfunding & the small amount of money donated per person results in a disincentive for taking legal action against fraudulent projects. There is also a risk of fraudulent crowdfunding platforms.
Slow pay off for investors: When investing in equity crowdfunding, investors usually have to wait longer to collect their profits than in other investment models.
Financial risks of investment-based crowdfunding: The participation of non-accredited investors6A non-accredited investor is any investor who does not meet the income or net worth requirements set out by the Securities and Exchange Commission (SEC). in investment-based crowdfunding may result in a high rate of project failures. Financial risks apply to donation & reward-based campaigns where there is a possibility that the project does not produce the projected goal or produces the goal later than promised. Additionally, the transaction fees may be a source of economic inefficiency, depending on the platform and size of donations.
Factors that influence the likelihood of funding
The risks of crowdfunding raise a number of important questions about how to avoid fraudulent practices and how to be successful at crowdfunding. Research7Forbes & Schaefer, Guidelines for Successful Crowdfunding, Procedia CIRP, Volume 60, 2017, Pages 398-403, ISSN 2212-8271found a number of factors that influenced the likelihood of funding and involvement in crowdfunding campaigns.
- Reputation – a good reputation of the cause within the chosen industry/sector sends a signal to investors that it can be a trustworthy source to support.
- Funding goal – there is more engagement with projects that have received a significant percentage of its funding goal very early on. With this in mind, it is advisable to set possible funding goals at the lowest possible rate to create the highest percentage funded when donations start to be collected.
- Rewards - funders react more positively to a range of products being available upon donation. It is important not to drift away from the purpose of the campaign.
- Profit margins - project creators should reduce the profit margin on popular reward options to encourage more backers.
- Chosen platform – choosing the correct/respected platform for creating a crowdfunding campaign can determine the response to the campaign. It can increase outreach and funds.
- Video content – visual aids assist in creating a larger outreach and response to campaigns. It is important to highlight key information that potential backers require, such as how the money will be spent, what are the motivations for the topic campaign, what are the risks associated with investing in the campaign and what is the plan for after the campaign?
The COVID-19 Solidarity Response fund for WHO9 A.D, Usher, ’WHO launches crowdfund for COVID-19 response’ The Lancet - World Report VOLUME 395, ISSUE 10229, P1024, 2020 is an example of how crowdfunding can be used to bridge funding gaps in times of crisis. In March of 2020, the World Health Organisation (WHO) launched the crowdfunding response, which was managed by the UN Foundation and the Swiss Philanthropy Foundation. It raised money from the public, the private sector and foundations. Through using the digital donation platforms of Facebook, Google and others, they raised $71 million US dollars in ten days.
The fund was established out of necessity to address the funding gap faced by the WHO. Kate Dodson, VP for Global Health at the UN Foundation stated that the donations would “support the WHO's overall strategic response plan for COVID-19 and it is geared toward the most vulnerable, at-risk countries with the weakest health systems”. The fund ceased active fundraising at the end of 2021.
This playbook, published by the fund, serves as a guide to how the Fund was set up and operated, and can be used as a resource for future endeavours. The playbook provided direct expertise to develop support for Ukraine – the WHO foundation.
The WHO Foundation, whose work supports the mission of the World Health Organization (WHO), launched the ‘WHO Health Emergency Appeal for Ukraine’ in response to the Ukraine crisis following the Russian invasions. As a result of life-threatening impacts on Ukraine’s health care systems, urgent funding is needed to treat patients wounded by the conflict or those in need of vital care. The funding was established out of necessity and as a reaction to the ongoing conflict in Europe.
A good example of a successful, non-financial crowdfunding campaign with a social purpose is Operation 15+15+15 by DoucheFLUX. In 2016, it raised over 15,000 euros via KissKissBankBank, a reward-based crowdfunding platform. DoucheFLUX is an organisation that promotes the reintegration of those needing help. They do this with a variety of inclusive services and activities, ranging from free showers to language lessons.
DoucheFLUX is a participatory social project which has so far relied entirely on private funding. It aims to achieve a balanced budget based on solidarity. By the end of 2018, it foresaw to cover the operating costs through three almost equal revenue streams: affordable charges for the services it provides, government subsidies, and receipts from fundraising campaigns and sponsorship agreements.
In 2016, DoucheFLUX reached a major milestone in its programme of socially innovative measures with the opening of its new 650 m2 building in Brussels. After a year of renovation works, 20 showers, a laundry room, 450 lockers, an information desk and computers are made available to the most underprivileged in a stimulating and convivial setting, encouraging friendly discussions and mutual respect.
The Marie-Louise Foundation in France is an institution of public utility. 35 years ago, there were no services available to support families of children with severe disabilities. In 1982, a small group of parents, led by current president of the Foundation Claude Rous, decided to address this challenge. Faced with a psychiatric hospital or home care, they took the initiative to build a “living house” to accommodate their children. Nowadays, the Marie-Louisiens continue their hard work, with enthusiasm and self-sacrifice, to welcome new residents, ensure their well-being and build new houses.
The Foundation’s mission is to promote the wellbeing of adults with severe disabilities. Marie-Louise offers solutions to shape the best possible living environment for its residents thanks to its seven adapted living spaces (6 houses and a farm with a horse-riding therapy centre), a nursing staff, and quality activities and care.
The Marie-Louise Foundation launched a crowdfunding campaign to offer occupational therapy to its residents and open the farm to others who wish to visit. On the KissKissBankBank platform, the foundation aimed to raise 8.500 EUR to establish a fruit and vegetable garden, which would bring physical and psychological benefits to the residents. The campaign objective was overachieved, the foundation saw 142 donations and raised 17.440 EUR for its project.