On December 27, 2022, after more than a year of effort, Wefunder got the green light to launch our business in Europe. This post walks through a short history on how we got here, the state of the European market, and where things are headed.
A Short History
In 2012, Wefunder’s cofounders Nick Tommarello and Greg Belote wanted to invest their spare change into their friends’ startups, and quickly found out this was illegal. Even though they believed in their friends, the laws prevented them from investing because they weren’t rich enough to be considered “accredited investors.”
Upset at this, Nick and Greg set up the first version of the Wefunder website as an online petition to change the laws. After lots of campaigning, PR, and a visit to Congress, they were able to get the first US crowdfunding laws passed. And so an industry was born…. or so they thought. In reality, it took the regulators 4 years to write and implement the new laws.
In 2016, Regulation Crowdfunding went live and Wefunder quickly became the leader in this new industry. But those laws were deeply flawed: they allowed raises of only $1M per year and forced founders to accept hundreds (or thousands) of direct investors on the cap table. So despite being the market leader, their ability to grow the business was severely limited.
In 2021, we finally got updated regulations that opened up the playing field: raises up to $5M, SPVs to aggregate investors, and the ability to launch campaigns much faster. While we still have a long wishlist of regulatory changes, we at least have a workable set of regulations that some of the hottest startups like Substack, Replit and Mercury are excited to use. The entire industry has grown tremendously as a result.
Europe Lagged Behind
Outside the U.S., the world has very few attractive crowdfunding markets. To support a strong market requires (1) an established and workable legal regime, (2) a deep startup ecosystem, and (3) a large investor base that’s interested in risky startup investments. The UK meets these criteria — in fact it is the world leader per capita, having enacted workable laws in 2014 — and as such features the strongest platforms and crowdfunded startups outside the U.S.
The rest of Europe has long featured a patchwork of contradicting regulations, making it nearly impossible to operate in a cross-border way. In some countries, investment crowdfunding was completely illegal; in others it was allowed with varying degrees of restrictions; and in others still, it was completely unregulated and rife with questionable actors.
No individual country met the three requirements for a strong market. Germany had a depth of startups but challenging regulations. The Netherlands had reasonable laws and strong startups, but too small and conservative an investing population. Countries like Poland with no regulations were lacking a strong ecosystem. As such, a patchwork of small platforms popped up servicing each country’s local market. But because the markets were too small to support powerful platforms, the products they offered could only pull in early adopters.
Being a crowdfunding platform is a deceptively hard business. Without a cross-border mindset and enough volume to support a world-class product team, it’s nearly impossible to build a good platform. In Europe, the average value proposition to founders was something like: “How about we raise a few hundred thousand Euros for your company? All you’ll have to do is recruit and manage 1000+ direct investors. And there will be a LOT of due diligence and compliance hoops to jump through. And we’ll be taking 12% of funds raised. Oh and by the way, it’ll be debt so make sure you generate enough profit to pay that back with interest in the next two years.” Enticing, right?
The Outlook Changes
It’s probably no surprise that until recently, we never considered geographic expansion. The UK was dominated by two entrenched platforms, and any significant business in continental Europe would mean juggling several different legal regimes.
In November 2021, all that changed when the European Crowdfunding Service Provider Regulation (ECSPR) went into effect. For the first time, all 30 EEA countries would be covered by a consistent set of regulations, with a passporting regime that allows platforms to register in one place and operate on a cross-border basis. The doors were swung wide open.
Even better, the new EU regulation is similar to, and in some ways better than, the new U.S. laws. ECSPR allows for raises up to €5M per year, with no limit on individual investment size. Investments can be aggregated into 1 line on the cap table, with a single lead investor making decisions. Companies can simultaneously raise even more in the U.S. from accredited investors. Typical terms are allowed, including equity, convertibles and debt. The required legal disclosures have been condensed down to 6 pages and don’t mandate audited financial statements (something that has burdened the U.S. implementation). And many of the burdensome technicalities from the U.S. regulations — eg. filings and annual reports — are absent. The net result is that for a company prepared to fundraise, we can launch a raise in as little as a week, with minimal hassle for the founders.
The State of the Market
In 2022, I spent 6 months traveling around Europe’s main startups hubs, meeting founders and investors. I’ve been very impressed with the quality of startup talent here. There are at least a dozen pockets of exciting ecosystem development, and the atmosphere is reminiscent of Silicon Valley 10 years ago, before the cynicism set in. The stats prove this out: Europe has become the fastest growing major region for venture capital investment, outpacing both the US and China.
Yet, crowdfunding is still just a tiny portion of startup funding volume. Part of this is lack of awareness: most of the startups we speak to have never heard of it as an option. Most of the rest immediately think of the “1000 direct investors and a migraine for a tiny amount of debt capital” formulation. We’re on a mission to change that — first by building a founder experience that’s an order of magnitude better than any previous platform, and then by convincing the best startups in Europe to open Community Rounds to let their customers, fans, and community invest.
Challenges and What’s Next
While the opportunity in Europe is promising, the implementation has not been without its hiccups. Although the regulation is supposed to be unified across the EU, not everyone agrees on what the new rules mean. Country-by-country rules in some areas, such as marketing campaigns, can still lead to confusion. A 1-year grandfathering period for existing platforms was extended to 2 years because platforms and regulators couldn’t prepare in time. We are also battling a historic downturn in venture investing caused by increasing interest rates and a struggling economy.
These wrinkles will likely take a year or two to get ironed out, as ESMA provides further guidance, regulators get on the same page, more platforms are authorized, and the market improves. In the meantime, the trailblazers will work through the details (with legal bills to match) and start letting the next generation of great European startups raise from their communities. We look forward to being at the forefront of European startup development!
