European start-ups court crowds for cash

PARIS Wed May 9, 2012 9:47am EDT

A machine counts and sorts out euro notes at the Belgian Central Bank in Brussels October 26, 2011. REUTERS/Thierry Roge

A machine counts and sorts out euro notes at the Belgian Central Bank in Brussels October 26, 2011.

Credit: Reuters/Thierry Roge

PARIS (Reuters) - 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 colorful 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 stakes.

According to a report on the industry by research firm Massolution, crowdfunding platforms raised nearly $1.5 billion 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 percent in March, down from 0.8 percent in February. This was despite moves by the ECB to flood the euro zone's banking sector with more than 1 trillion euros of cheap three-year cash.

Pur et Caetera collected 97,000 euros ($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 euros 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 equity-raising platforms.

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 U.S.-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 $200 million, 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 2 million euros for 800 projects.

Its peer, KissKissBankBank, raised about 1 million euros last year, up from 200,000 in 2010.

"It's accelerating, but we still don't see exponential growth like in the U.S. We're still spreading the gospel," KissKissBankBank CEO Vincent Ricordeau told Reuters.

He highlighted language and legal barriers between countries, along with a less favorable 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," Ricordeau said.

In a bid to promote a more favorable 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 harmonize 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 U.S., the JOBS Act signed into law last month allows entrepreneurs to raise up to $1 million 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 de-regulated 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 organization with membership criteria "before there's a disaster".

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 euros 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 euros a night", Merquiol quipped.

($1 = 0.7625 euros)

(Editing by Peter Graff)