The German Mittelstand

Crowdinvesting seems to have the makings of a concrete alternative for financing Mittelstand enterprises, German SMEs

Of late, Crowdinvesting and Crowdfunding have become increasingly successful in Germany. Despite often being used as synonyms the two systems are highly divergent in certain areas. Crowdinvesting grants the investor ownership  of share quotas and hence, similarly to shareholders and owners of dividend bearing stock, access to the financial benefits that accrue from company profits. This is the investment format most often adopted for funding start-ups. Crowdfunding is different. Investors do not receive share quotas but compensation that can be evaluated monetarily or repaid by other means in kind. By and large, crowdfunding is the most usual way of funding a charitable or artistic project.

One crowdfunding success story was the production of the film for cinema “Stromberg – der Film”. When it became clear that traditional funding was not going to work, the production company, Brainpool, opted for crowdfunding over the Internet. Fully aware that return on their investment depended on the box office grossing more than a million attendees, 3,300 small investors had soon put up one million Euros. By end March, over 1.2 million people had paid to see the film. A success story; a major boost for the crowdfunding market, with significant positive spin-off for crowdinvesting too.

The market volume of crowdinvesting in terms of ownership of share quotas is growing fast. Against 0.5 million Euros that Ludwig-Maximilians-Universität in Munich reported invested for 2011, the 2012 figure had leapt to 5 million. Now, the Insitut für Mittelstandsforschung in Bonn reports that financing through crowdinvesting in 2013 stands at 10.6 million Euros. The market is presently dominated by three major platforms, namely Seedmatch, Innovestment and Companisto.

If this continues to be the trend of crowdinvesting, German Mittelstand could find itself with some enticing options, in particular as regards new company start-ups and projects offering other kinds of investment. The demand for money and the time needed to collect it are (still) within reasonably manageable proportions. Unlike their counterparts in the United States, German issuers wishing to raise capital in this way are in the happy position of being unfettered by legislation. There is as yet no call for the costly and time consuming process of producing mandatory issue prospectuses.

Today there is no record of any start-up project funded though the portal of crowdinvesting having failed. The point is noteworthy despite the fact that the number of companies involved so far is just over 70. The experts at Ludwig-Maximilians-Universität in Monaco don’t rule out the eventuality of some future bankruptcy, but in times when fledgling, undercapitalised companies have virtually no chance of getting listed, SMEs ought to give some thought to alternative forms of financing, such as crowdinvesting.