Crowdfunding start-ups face competition from incumbents

LBS expert says incumbents have potential to take large market share
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European start-up crowdfunding platforms could be left fighting for their piece of the pie according to new research from a strategy and entrepreneurship expert at London Business School, which finds that incumbents, including financial, not-for-profit, and non-financial organisations, are entering the crowdfunding business in increasing numbers.
The research was conducted by Gary Dushnitsky, Associate Professor of Strategy and Entrepreneurship, London Business School, Massimiliano Guerini, Assistant Professor, Politecnico di Milano and Evila Piva and Cristina Rossi-Lamastrais, Associate Professors, Politecnico di Milano. It analyses the proliferation of crowdfunding across Europe. 

“The proliferation of crowdfunding across Europe is not being solely driven by start-up firms”, says Dr Dushnitsky. “Our research points to a number of incumbent organisations entering this market and operating crowdfunding platforms.” 

According to the research, 21% of crowdfunding platforms across Europe are operated by incumbents, and this number is set to grow. 

“While the crowdfunding industry is still very much in its infancy, an increasing number of incumbent organisations are starting to view it as a valuable business opportunity, or as a means of diversifying their business”, says Dr Dushnitsky. “This is especially true of financial and non-financial organisations.” 

Of incumbent crowdfunding platform operators across Europe, the research finds: 
• 24% financial institutions
• 30% not-for-profit organisations
• 46% firms from non-financial sectors

A rise in incumbent organisations operating crowdfunding platforms means crowdfunding start-ups will not only need to monitor competition from existing crowdfunding operators, but also from organisations such as large banks, who are entering the crowdfunding business. 

“Incumbents, particularly those in the financial sector such as large banks, find it much easier to enter the market and manoeuvre the regulatory minefield involved in developing a crowdfunding platform. 

“These organisations have immediate resources, such as legal expertise. Accumulated resource makes them much more likely to stay the course than smaller start-ups who don’t always have these skills readily available. It is much harder for smaller organisations to compete”, says Dr Dushnitsky. 

“Larger incumbents also find it easier to scale up. Again this is down to resource and capital. If more incumbents enter the market in the coming years as the industry grows, which is very likely, start-ups could eventually find themselves being outnumbered by these larger organisations. Start-up platforms will have a tough fight on their hands to keep market share.” 

Crowdfunding start-ups in Portugal face the greatest competition from incumbents. 43% of the total number of platforms in this region are currently owned by incumbent organisations that have infiltrated the crowdfunding market. 

Dr Dushnitsky says: “Countries such as Germany, France, the Netherlands and United Kingdom exhibit a vibrant industry with more than 50 active platforms. Start-ups in these countries will start to feel the squeeze from incumbents first.” 

In other European markets such as Denmark, Greece and Luxembourg however, crowdfunding start-ups currently face zero competition from crowdfunding incumbents, who, at present, are absent in these markets.  

“In countries such as Luxembourg and Greece, the crowdfunding industry is still a new concept with very few active platforms. In the future, this will no doubt change as the industry expands across Europe”, says Dr Dushnitsky.

“It is important to remember that the crowdfunding industry is still very much in its infancy; there is space for both start-ups and incumbents entering the market. It is very much about these organisations finding their feet and place in this market.”

The research was based on a proprietary database of 15 European countries. The researchers analysed a census of more than 600 European crowdfunding platforms launched in EU-15 countries up to the end of 2014, to depict a rich picture of the creation of crowdfunding platforms in Europe. No other study to date builds on such an extensive data collection within the European context.