The Crowdfunding : A New Financial Instrument for the Start-Ups ?

Start-ups are new businesses, which need a good amount of equity to finance investments. Crowdfunding is an alternative instrument to collect money. It does not need the intervention of a bank, but allows to obtain the funds directly from the public by network platforms. This article focuses on the possibility for a start-up to raise capital through crowdfunding. The argument is quite known on an international level, even if scholars often focus on specific problems or on particular moments of the life cycle of the start-up. On the contrary, the two arguments are really new in Italy. The Italian crowdfunding market is young – the main increase in the platforms number (+63%) is between 2013 and 2014 and the national regulation which allows to finance start-ups by crowdfunding is even more recent (latest legal document in 2017). The novelty of the topic explains the added value of this article. To the best of our knowledge, no previous study focused on the Italian start-ups financed by crowdfunding. We analyze the phenomenon from the birth of the different platforms (2005 for the first one) since the end of the first semester 2018.


Introduction
Our interest for the subject has been sparked by its novelty.Innovative start-ups and crowdfunding are young themes, especially in terms of national legislation.Given the difficulty faced by innovative businesses in raising funds, and the origins of Italian crowdfunding, we have identified the system as a new form of financing.The main increase in the number of the Italian platforms is +63% and it has been registered between 2013 and 2014.Italian regulation about equity crowdfunding is even more recent: the date of the latest legal document is June 2017.In Italy the field is still at the infant level, but -given the development opportunities demonstrated in the international context -it certainly shows excellent growth potential.
The theme has been analyzed more in depth at the international level, but scholars often focus on specific problems or to particular moments of the life cycle of the start-up.On the contrary, we look both to the birth and to the total life of a start-up, which needs a suitable amount of equity to launch and develop new businesses.Finally, we cannot forget that successfull start-ups usually develop outside the country of origin.The argument is therefore interesting both for Italian entrepreneurs and for international commerce.
The phenomenon is studied from the birth of the Italian platforms (2005 for the first one, named Produzioni dal Basso) since the end of the first semester 2018.Starting from Produzioni dal Basso, we consider an historical period of 13 years, but -considering that most platforms were born in 2014 -we have a panel of 4 years.After the introduction (paragraph 1), the literature and method (paragraph 2), we present the main and most interesting information in paragraphs 3 and 4, which offer a detailed description of the Italian start-ups and crowdfunding markets.Paragraph 5 concludes, reflecting about the better resources for the Italian start-ups.
Considering studies on crowdfunding in Italy, the situation is completely different.The argument is new and we make reference to:
While on international level the studies of Ley and Weaven, Costanza, Paschen, Di Pietro, Prencipe and Majchrzak are focused on both start-ups and crowdfunding (even if to solve some specific life cycle problems), in Italy the two sectors are not exhaustingly treated together.

Method
Our work has consisted in an accurate update of the information collected about Italian start-ups and crowdfunding.Our research has included the collection of written literature and online literature, as well as interviews to professionals.
To study crowdfunding, we analyzed observatory reports and connected to the network.The objective was to verify the actual existence and functioning of the portals, as well as the presence of descriptive documents about regulation.The written and online literature has been completed by the participation to specific conferences, which gave us the opportunity to develop contacts and interviews (Note 1).
The analysis proposed is focused on the total number of Italian start-ups and on the total number of Italian crowdfunding portals.As far as possible we gave the cases a uniform treatment.

Start-Ups and the Capital Market
Today, the term "start-up" -initially created to identify new companies launched in the IT and new technology sectors -is applied on a wider scale and includes all new businesses, independent of their sector of pertinence (Brusa, 2016).
Easily accessible official data related to the size of the start-up industry in our country only include innovative start-ups registered in the specific section of the Italian company register, in accordance with Italian Decree-Law n° 179/2012 named Decree for Growth 2.0 (Note 2).
On the basis of the aforementioned data, Table 1 provides a snapshot of the system of "profit-oriented" start-ups present in Italy.Disaggregating the analysis to the city district level, Milan features 1,494 start-ups, immediately followed by Rome (798) and Turin (322) (see Table 3).Once again, the statistics processed by the Company Registry highlight a significant indicator of the issue that all start-ups face: the obtainment of funds necessary for their launch.
The financial independence indicator for innovative start-ups, calculated as a ratio of assets funded through equity, appears to be slightly lower than the indicator for all joint-stock companies (0. Contact with investors occurs through an online platform, which excludes traditional banking intermediation.Subjects involved may be classified in two categories as follows: -Creators or borrowers, who ask and receive funds from the public; -Crowdfunders: natural or legal persons lending funds.
1.The creator launches the idea by publishing it on the platform.
2. The crowdfunder becomes the lender.
3. The creator collects funds and becomes the borrower.On an international level, the first relevant experiment dates back to the late 1800s, when the U.S. magazine The World used it for the erection of the Statue of Liberty.In 2008 Barack Obama used the tool to fund his election campaign.
The start of Italian crowdfunding history may instead be considered 2005, when Angelo Rindone (professional web consultant) founded the platform "Produzioni dal Basso".The main increase was registered in 2013-2014, during which the number of the platforms grew by 63%.Starting from the birth of Produzioni dal Basso, we consider an historical period of 13 years, but -considering that most platforms were born in 2014 -we have a panel of 4 years.
There are essentially four types of crowdfunding (see Table 5): donation, reward, equity, and lending.In donation crowdfunding, participation is not reward-based; it is a donation in favour of the promoter of the initiative.In reward crowdfunding, the funder receives a non-monetary reward, such as a gadget, a discount, or a trial sample of the project sustained.Equity crowdfunding involves share-based participation, and gives the funder both equity and administration powers.When rewards are provided in the form of interest, crowdfunding is called lending crowdfunding (Note 6), with funds being an alternative to bank indebtedness and/or bonded debt.Further categories exist, created as hybrid models or developed as a supplement to the ones listed below (Note 7).The project success rate is about 30%, given that the use of funds collected may be either dependent or independent of reaching certain goals (all-or-nothing as opposed to keep-it-all).Considering the crowdfunding most accessible by national start-ups, the remainder of the article shall focus on equity and lending crowdfunding.

Crowdfunding Regulations
Italy is among EU countries with most legislation on the matter, though limited to equity crowdfunding.The aforementioned regulations establish guidelines for management of platforms, reserved to banks, joint-stock companies, and individuals authorized by CONSOB.In fact, the commission holds a specific registry, subdivided in two categories: ordinary and special.The first category includes the list of companies authorized by CONSOB, while the second category includes the banks and brokerage firms directly authorized by the central bank of Italy.
To grant access to the ordinary category, CONSOB verifies the following prerequisites: -The joint-stock company structure; -The respectability and professionality of stockholders and administrators; -The existence of a report concerning the corporate activity and structure.
Periodic verification of registry members occurs through request of information and documents, as well as inspections.Breaches are punished with fines or through suspension or cancellation from the registry.
Moreover, the CONSOB Regulations establish the disclosure standards undertaken by the platform, allowing users to make conscious investment decisions.Funding requests must not exceed 5 million Euros, and 5% of the total must be undersigned by professional investors (banks, insurance companies, foundations, investment funds, pension funds), who increase the reliability of the projects.Before subscribing the online proposals, retail investors must complete an informed path, stating to have understood the characteristics and risks related to innovative start-ups and to be able to sustain eventual financial losses.Small investors are always recognized the right to unmotivated withdrawal without financial loss, exercisable within 7 days from the date of subscription.
Withdrawal is also justified in the eventuality of changes or corrections to the information initially provided, or in case of transfer of share ownership.
Decree-Law n° 3 issued on January 24 th 2015 -amended as Law n° 33 issued on March 24 th 2015 -has introduced the first change to the regulations, extending the use of equity crowdfunding to innovative SMEs, to UCIs, and other joint-stock companies investing in start-ups or innovative SMEs.The innovative SMEs are joint-stock companies, not listed on any regulated market, and with their latest certified financial statements published in Italy and latest fiscal residence in Italy.They share at least two of the three innovation requirements of start-ups, but have lower thresholds in terms of size and quality standards.CONSOB has thus revised the 2013 Regulations n° 19520 approved on February 24 th 2016, introducing the following fundamental changes: -Serial investors (including business angels, Note 9) must purchase at least 5% of the capital required, facilitating the fulfilment of the restrictions; -Platform activity must begin within 6 months of the authorization, otherwise it shall be considered void.
The major change has instead come into effect with Law n° 232 issued on December 11 th 2016, which has extended the use of equity crowdfunding to all SMEs registered as joint-stock companies.Nevertheless, upon drafting the document, the legislator has committed certain formal omissions, including the application of the provision to innovative start-ups and SMEs registered as limited companies.The omission was corrected by means of Decree-Law n°50 (the so-called Corrective Decree) issued on April 24 th 2017, amended as Law n°96 issued on June 21 st 2017.
Currently equity crowdfunding is therefore a type of crowdfunding accessible by both innovative start-ups and SMEs, registered in any form.

Equity Crowdfunding
Observatories show that, as at the first semester of 2018, 27 equity crowdfunding platforms exist in Italy: 25 registered in the ordinary category, and 2 registered in the special category (see Table 6).Coherently with the trend recorded for target funds, the percentage of funds offered also shows a negative trend: 27% in 2014, 8.6 % in 2018.The maximum value was reached in 2017, with the percentage of 99%, while the minimum value is recorded in 2018, with 0.17% being offered.An interesting change occurred in terms of minimum investment allowed.In 2016, 2017 and 2018 most investors (65%, 59% and 51% respectively) offered between 101 and 500 Euros, but whilst in 2016 19% of funders preferred to invest less than 100 Euros, in 2017/2018 the 24% -35% of them were willing to invest between 501 and 1,000 Euros.Finally, the bottom part of the table shows the funding objectives.Since multiple answers were allowed, the total amount exceeds 100%.59% of capital is allocated to marketing expenses, 37% to the platforms development, 34% to R&D, 32% to geographic expansion, and 26% to employment.

Market consolidation 12%
Other (no detail) 6% Figure 3 describes the projects in terms of shares held conveying voting rights to crowdfunders: with voting rights, without voting rights, and hybrid.Most shares convey hybrid rights (48%), which only allow main investors to have voting power, followed by voting rights (37%) and not voting rights (11%).The Other category (4%) refers to shares conveying voting rights, but rights different to those normally conveyed (either in terms of privileges or of limitations).
ijbm.ccsen Table 10 provides the list of existent platforms (a total of 10) as at the end of June 2018, distinguishing them in function of the target user, which may be either consumer or business.

Conclusions
Currently 8,894 innovative start-ups (data updated as at March 31 st 2018) are registered on the Italian company register.Moreover, statistics processed on the basis of data collected by the company register highlight an issue common to all innovative start-ups, regardless of their sector, related to the degree of financial independence.
Oppositely to what has been hypothesized by supporters of the so-called "financial growth cycle" (Berger and Udell, 1998) -according to whom the resources available to a start-up (in particular an innovative start-up) follow a financial hierarchy which establishes that funding in the form of equity must have the priority over resort to bank indebtedness, in that the former is less expensive and more suitable for the purpose -the Italian situation shows how start-ups severely struggle to reach a suitable amount of equity.The financial independence indicator, calculated as a ratio of assets funded through equity, shows that start-ups have a similar financial structure to that of existing joint-stock companies (respectively a 0.35 versus a 0.38 indicator, 2015 data), which by nature rely mainly on debt capital.The peculiarity of the Italian situation may be explained by the opportunity -offered by the Decree for Growth 2.0 to innovative start-ups -to have a simplified, free, and direct access to the FGPMI.By doing this, though, lawmakers have favoured the development of a leverage-based Italian start-up system, with all the related criticalities that such type of financial structure implies for business initiatives in their launch phase.
Given the above, what are the resources Italian start-ups may draw from to guarantee themselves a suitable amount of equity representing a solid financial base to launch their new business?
Upon having illustrated in simple terms the most suitable funding sources to satisfy the requirements of start-ups, following the financial growth cycle approach, this article has focused on the opportunities offered by crowdfunding platforms available online.Crowdfunding represents an innovative fund collection tool, ruled (within the limits of equity-related factors) by EU legislation and, on a national level, by CONSOB.As highlighted upon processing available data collected by the related observatories, crowdfunding is certainly growing at a fast pace.To complete the analysis, we have also performed a census of active lending crowdfunding operators in Italy.The sector shows much room for improvement, considering that only three of the platforms are purposely designed for businesses.Nevertheless -as previously underlined -peer-to-peer lending does not seem to be suitable to satisfy the hunger start-ups show for "patient capital", although according to certain experts the leverage-based Italian start-up system may become a winning model in the future (Econopoly, 2017).
• Have as their exclusive or primary business purpose the development, production, and commercialization of high-tech innovative products or services; • Have not been created as the result of merger, demerger, or following the sale of a company or company branch; • The innovative nature of the company is attested upon confirmation of at least one of the following three criteria: a) A sum equal to 15% of the higher value between turnover and annual costs is allocated to research and development activity; b) The total workforce includes at least 1/3 PhD candidates, PhDs, or researchers, and at least 2/3 associates or co-operators to any extent must own a Master's degree; c) The company owns, has registered or licensed a patent (industrial property), or owns registered software.
In order to benefit of the related incentives, innovative start-ups must register in the special section of the Italian company register, deposited at the Chamber of Commerce.Note 3. See: Italian company registry, Innovative start-ups, 1st trimester 2018, table 11.
Note 4. The FGPMI is a state fund that facilitates access to credit for innovative start-ups by means of a guarantee equal to 80% of the funding amount loaned by a bank (up to a maximum of 2.5 million Euros).
Note 5. Figure 1 and Table 5 are realized by C. Rovera.The tables and graphs that follow are a re-worked version (in some cases a mix) of more than one source; for this reason the single sources are not quoted.The origin of the data is in any case always indicated in the commenting text.
Note 6.Or, in alternative, debt or peer-to-peer crowdfunding.
Note 7. One of such categories is royalty crowdfunding, which is reward-based as a function of turnover across a given time period.
Note 8.The Italian securities and exchange commission.
Note 9. Business angels invest equity in newborn companies with strong growth potential (i.e.start-ups).The amount invested is not collected from third parties but is comprised of personal funds held by investors.
Note 10.The compound annual growth rate is the mean annual growth rate of an investment over a specified period of time longer than one year.
Note 11.The data are calculated excluding the investment vehicles and the Walliance campaigns.

Table 1 .
Italian start-ups by market sector Source: Italian company registry, Innovative start-ups, 1 st trimester 2018.

Table 2 .
Italian start-ups: regional distribution

Table 3 .
Italian start-ups: city district distribution -ranking of top-

Table 5 .
Crowdfunding types The majority of Italian platforms are reward-based, though the greatest sums in 2015 were collected through hybrid types, including reward+donation and donation+debt (+23.8 million Euros).If one considers that the total sum collected amounted to 23 million Euros in 2013, 31 million Euros in 2014, and 56.8 million Euros in 2015, the values highlight a positive trend equal to +35% and +83%.
The main references are the 2012/557 ESMA document (Investor warning about online investments); the March 27 th 2014 EC notice and the EBA Opinion issued on February 26 th 2015.The documents lay out the essential traits of crowdfunding, highlighting the sources of risk and the related reparatory directives (PSD 2007/64/EC).Equity crowdfunding in Italy was initially designed for innovative start-ups, under the legislation of Decree-Law n° 179 issued on October 2012, later amended as Law n° 221 issued on December 17 th 2012.Detailing of the legislation was assigned to CONSOB (Note 8), which published Regulations n° 18592 on June 26 th 2013.

Table 6 .
Equity platforms Total figures related to the project funding campaigns are shown on Table7.Collected funds only refer to successfully concluded initiatives at 30 th June 218.It is interesting to notice the existence of platforms whichthough established in the 2014-2015 biennium -have yet to publish projects (see: Fundera, Ecomill, and Crowd4capital), while others (Tifosy, Italyfunding, Ideacrowdfunding, Ideacrowdfunding, Thebestequity, Leonardoequity, Concreteinvesting, It.lita.comand Lifeseeder) are either too young (born at the end of 2017 or at the beginning of 2018) or have presented initiatives difficult to relate to the traditional crowdfunding market.The latter refer to, for example, Clubdealonline, whose projects are not publically accessible as it requires membership-type participation.

Table 8 .
Projects presented

Table 9
The first-ever crowdfunding operators in Italy once worked as intermediaries in accordance with Article 106 of the Italian banking act (Note 12).Their legal framework is Decree-Law n° 11/2010, in implementation of the PSD 2007/64/EC, which -along with Resolution n° 584/2016 issued by the central bank of Italy -defined them as Payment Institutions.

Table 10 .
Lending platformsCoherently with the scope of the article, we shall focus only on pure business-targeted platforms: BorsadelCredito, Lendix, and TheSocialLender.Table11highlights the requirements that the applicant must satisfy, which vary from platform to platform.While requirements by Borsadel Credito are outlined in detail, Lendix and TheSocialLender requirements are more generic, as the assessment is allocated to an internal commission.For Lendix this is due to the internationalization of the platform, born in France but recently expanded to Spain and Italy.TheSocialLender, on the contrary, is a new entry in the Italian market; born in November 2017.

Table 11 .
Applicant requirementsThe amounts loaned as at June 2018 are outlined in Table12.As further proof of TheSocialLender's young age, data related to it do not refer to the successfully concluded campaigns, but to those in progress.Therefore, there is not certitude about the reported values and sometimes they are not available (Na).The greatest amount of campaigns is that of Borsadel Credito with respect to Lendix (482 versus 40).The same occurs in terms of sums loaned, equal to 38 million of Euros for Bordsdel Credito and 19.5 million of Euros for Lendix.The average loan granted by Borsadel Credito amounts to 40,000 Euros, the average expiry of loans granted was about 28 months, and average annual nominal interest rate was 5.27%.The protected fund depends upon the applicants, who pay a specific warrantee commission.Finally, Borsadel Credito offers a commitment unknown to Lendix: it directly funds a minimum percentage of the projects (51%), making the offer more credible and projects more easily feasible.

Table 12 .
The amounts