Alternative finance and its potential to support research and innovation
Alternative finance (AF) represents an important source of funding for research and innovation (R&I); policy actions to overcome market barriers and exploit potentials of these forms of finance are relevant for Interreg Europe partners willing to leverage private investments using public intervention. The estimated aggregated value of alternative finance investment in R&I in the EU was approximately EUR 755.1 million in 2015, which constitutes between 1/6 and 1/8 of the total value of the European alternative finance market.
The impact of AF and in particular of crowdfunding was investigated by a study assigned by the European Commission’s Directorate-General for Research and Innovation (DG RTD) to the European Crowdfunding Network ECN together with Open Evidence, EY and Politecnico di Milano.
As Christian Saublens, former Director of EURADA, used to say “all money is not the same”. The study highlighted a clear distinction between funding models for research versus innovation. Donation and rewards-based funding models are mostly suitable for basic research, whilst equity and in part lending and reward, are useful for later stages of the innovation cycle, closer to market. Projects funded by equity and lending platforms are bigger than those funded by rewards and donation, thus innovation AF campaigns are bigger than those focused on research. R&I projects raise, on average, more funds than other projects but have lower success rates.
An inspiring example, the concept of public matching funds
Platforms specialised in the matching funds would pre-select projects which, after reaching a specific level of funding from the “crowd” and or professional investors, would receive the remaining money from public budget, including EU funds. In practice, public donor would commit to contributing a certain percentage of the pledged amount (platforms mention 30% of a total sum pledged) or a certain sum from the start, up to a specific agreed level. Only after reaching this level would the European Commission would contribute the remaining amount.
The market expertise of crowdfunding platforms and wisdom of the “crowd” will result in a risk minimisation tool for investing in R&I, increasing the impact of public funding.
City of Milan and matching fund initiatives - a good practice from the study on AF
In Italy, the mayor of Milan launched collaboration with reward crowdfunding platform Eppela (IT) to distribute EUR 400,000 to support innovative business projects with high social impact. Projects that received initial level of funding from crowdfunding platform (50%) would receive further funding from the City of Milan.
Relevance for partnerships on research and innovation
Matching funding approaches can be relevant for these partnerships looking at practices to improve efficiency and leverage of public funding. The most relevant areas of intervention for AF Interreg Europe partners can consider when distilling policy improvements are:
- Later stages of the innovation cycle, when the results are easier to anticipate and evaluate by the “crowd” (according to the study results, there are on average three times more innovation-oriented projects than research-oriented projects);
- Initiatives dealing with improvement of life-conditions (energy, environment, food, health);
- Less capital-intensive projects (e.g. not for nanotechnology and research in space).
For more information on recommendations in support of alternative finance for research and innovation, get the full Study here