English
25.03.2013

Crowdfunding: “We need a culture of innovation”

Kickstarter collected close to USD 320 million for crowdfunding projects in 2012 alone. A veritable boom has arisen around this alternative means of financing in recent years. Now, the recently launched platform 1000x1000.at wants to establish crowdfunding in Austria.

"Development of 1000x1000.at started in 2010. The first version of the platform went online in March 2012," Reinhard Willfort, managing director of the Graz company Innovation Service Network (ISN), which operates the crowdfunding platform, told futurezone. After that, contact was sought with government officials and potential partners. At the European level, 1000x1000.at has also been involved in the development of A Framework for European Crowdfunding, which Willfort noted is currently the only such framework. "Working with the knowledge we gained through this, we then really got started with a relaunched platform at the beginning of this year," Willfort said, summarizing how the platform was created.

A premiere for Austria
Unlike in Germany, little has happened in this area, and there is limited willingness to accept risks in financing (as futurezone reported) – a frequent cause for complaints in the local startup scene. Aside from the platform Respekt.net, there was essentially no way to finance projects through crowdfunding. Willfort`s 1000x1000.at wants to change that, and feels that the time is right.

"Crowdfunding in general and our platform are just what the doctor ordered. With savings accounts offering 1.7 percent interest at best, inflation at 2.8 percent and entrepreneurs having a very hard time getting risk capital to finance innovative ideas, a new market with new players and offerings is opening up," Willfort said. In addition to gaining access to risk capital, companies also get access to a valuable network with the right people from their respective industry. Investors get an opportunity to support sensible projects with a reasonable investment and to be closely involved in implementation without having to be entrepreneurs themselves. "Every micro-investor has the chance to build a portfolio of different equity holdings and to reduce the risk they are exposed to in this way," Willfort said. Crowd investing has the potential to successfully create a new kind of ecosystem in Austria with direct and transparent innovation financing.

Major challenges
At the international level, platforms such as Kickstarter, Indiegogo (futurezone interview

) and Startnext have enabled crowdfunding to pick up speed in recent years. The global market is currently estimated at USD 500 billion. But as elsewhere, not all that glitters here is gold. There are also those who warn against succumbing blindly to the hype surrounding crowdfunding. In the Austrian gaming industry, for example, it is "extremely hard work" (futurezone reported
). Willfort also sees major challenges that must be overcome before crowdfunding and crowd investing become established in the Alpine republic: "Right now, we have 60 project requests but not enough crowd investors to cover the demand," he said. After putting more and more of their money in alternative investment vehicles in past years and then watching these investments tank, many investors have become much more cautious again.

"So what we need to do now is provide information about new, transparent forms of investment like crowdfunding," Willfort continued. The medium-term goal for 1000x1000.at is to network 10,000 crowd investors. Crowdfunding has the potential to bring the financial system a little closer back to the original intent of banking.

Willfort noted another hurdle: "We need an innovation culture in Austria that includes accepting when some projects fail. Anyone who fails at a project in Austria is subject to virtual ridicule. This understandably limits the motivation to try again." Things are different in the USA, he said, where investors see if an investor has had such an experience and include this in their decisions.

 

How 1000x1000.at works
Anyone who wants to be an investor on 1000x1000.at must first register on the platform. Depending on the project, people can invest between 250 and 5,000 euros. "Investors are awarded participation certificates in accordance with the amount of their investment that entitle them to participate in the annual profits and to receive their proportionate holding in the assets of the company in the event that the company is sold," the platform explained. Investors finance projects up to a maximum amount of EUR 100,000 through 1000x1000.at.

The idea platform Neurovation.net is closely linked with the crowd investing platform. "Anyone who has an idea can submit it here and subject it to a first market test in the form of a community assessment," Willfort explained. At this stage, the point is to use the knowledge of the crowd and to improve the idea. "Ideally, teams are formed that can contribute complementary skills for further implementation. The most promising ideas are chosen by the community and invited to submit further documents, such as a business plan. "After this detailed assessment of the concept, the 1000x1000.at expert jury then examines the idea and selects the most promising projects from this short list," Willfort said.

Business ideas that are not suitable for crowdfunding are proposed to interested partners, usually VIP members of the 1000x1000.at investor network or other partners, for support and further assistance. Business ideas that are already sufficiently developed can go straight to the jury phase, Willfort said. Projects are continuously selected and proposed to all investors for support. Anyone can invest in principle. "We don`t recommend putting all your capital in one project, but to instead build a portfolio of different projects," Willfort explained. It is not very likely that all projects will fail.

"Security and transparency"
Before a financing project is started on 1000x1000.at, a minimum target amount and a fundraising period are specified. The investor must then transfer the funds to an escrow account where the capital is held temporarily. "Once the minimum amount that is specified by the company is reached, the overall investment is considered to have been successful," Willfort clarified. If the minimum amount is not reached within the specified fundraising period, all provided capital is returned to the participating investors. "Security and transparency are absolutely critical in crowdfunding," 1000x1000.at`s operators stress.

The platform itself generates income by collecting a fee for acting as a broker between investors and companies. "The platform operator only gets money for its services when financing is arranged successfully," Willfort explained. ISN also offers services for the implementation of the projects. "We also bear part of the risk and ensure a high probability of project success."

Differences to Kickstarter and Co.
"1000x1000.at provides equity-based crowdfunding, or crowd investing," Willfort said. This is one of the multiple forms of crowdfunding. Unlike platforms like Kickstarter and Indiegogo, the crowd investors receive an entitlement to participate in the profits and asset value of the company. "The invested capital is risk capital in any case," Willfort noted. Crowd investing is currently not legally possible in the USA. He said that the platforms in America only provide tokens of appreciation or initial prototypes to the donors in the event of success.

The typical exit scenario of a major investor is not the primary goal of crowd investing. But wealthier investors can help companies and projects at a very early phase with relatively little capital and can watch the company develop, Willfort said.