'Like our software? Buy a bit of our company'

Equity crowdfunding is a relatively new practice, and Italian startups are among the first to test it out. Without VC support, can companies use equity crowdfunding to turn investors into customers and vice versa?

Diaman Tech, a startup based in north-east Italy, had faith in its financial analysis software. However, the company lacked the money to develop its products further or build a sales network to distribute them. Not having a VC at hand, they eventually turned to a new source of investment: the internet. On 31 December, Diaman Tech became the first Italian company ever to launch an equity crowdfunding campaign.

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Equity crowdfunding is a newly-regulated form of financing that allows startups to sell stakes in their business on the web to individuals or institutions. It's the first fruit of a 2012 law — the so called Decreto Sviluppo — which was eventually fleshed out in July 2013 by the Italian stock exchange commission Consob.

With this move, Italy became the first European country to regulate equity crowdfunding, even beating the US where rules on equity crowdfunding, reports say, won't be in place before next summer.

The Italian way

For a country hardly known as a startup-friendly place, being a first mover is quite an accomplishment and might signal a shift in the Boot's attitude toward startups.

The general hope among industry watchers is that equity crowdfunding will open up a new stream of capital for what the Decreto Sviluppo calls "innovative companies" — that is, startups under four years old and specialising in high-tech products and services.

"I think it can be a watershed — a driver of entrepreneurial creativity that will revolutionise the startup funding landscape forever," Gianluca Dettori, president of venture capital firm DPixel, said.

With its open and democratic mechanism, equity crowdfunding is seen as an opportunity to overcome some of the problems holding Italian innovation back, such as the country's banks' reluctance to lend money, and traditional Italian cronyism.

"Once there's an array of competing platforms, potential access to capital will be more equal and based on the [company's] merits, not on connections," Matteo Paris, founder of StarsUp, a crowdfunding platform that should be launched in the next few days. "Also, if a company succeeds in raising money from crowdfunding, banks may view that as an implicit positive rating, encouraging them to lend [to the company] more easily."

Another possible benefit of equity crowdfunding, Paris said, is that it could push for companies to adopt a broader and and more diverse ownership structure: a typical Italian small and medium business is still usually a family affair.

And, with equity crowdfunding open to even small sums, the practice could help turn actual and potential customers into investors.

"This is an opportunity not just to raise money, but also to create a community of people who will use our products and at the same time, being investors, will care about their growth," founder of Diaman Tech Daniele Bernardi said. In order to foster this idea, the company's crowdfunding offer states that, depending on the size of the stake they buy, investors will also get discounts on the company's software.

No quick fix

Though a likely game changer, equity crowdfunding won't work miracles, at least not right away.  A period of learning about how the mechanism works, both by startups and their potential investors, will be necessary, particularly in a country that is traditionally risk averse when it comes to financial investments.

"It will be rough in the beginning, and there will be many failures, while investors need to better understand the risks and rewards," Dettori said.

Time will also be needed for equity crowdfunding to gain real momentum. Right now, only two Italian online crowdfunding platforms have received the green light from Consob and only one is already showcasing companies' offers. Big players like banks are still in a wait-and-see mode, while the bureaucracy required to obtain the watchdog's go-ahead might be delaying the launch of some platforms. According to a recent report by the association Italian Crowdfunding Network, a few platform managers fear the rules could be too tight to help the market flourish.

Let's get started

Startups nonetheless are keen to get started. "We have been contacted by many companies that want to put their offers on the web," said Leonardo Frigiolini, founder of Unicaseed, the equity crowdfunding platform that is hosting Diaman Tech's bid. However, he added, the company is opting not to rush things. "We are going to be selective and use this first campaign to finetune the website and the whole process," he added. StarsUp says they are planning between 10 to 15 offers in 2014, the first being a company building a solar energy propeller for boats.

For Diaman Tech, to have a partner on hand to help navigate the crowdfunding path could some of the pressure on the company that comes with being the first to try such an approach. "Now that we are in, we feel quite a responsibility," Bernardi said. “We have to be successful, not just for us, but for the idea of equity crowdfunding and for other companies like us. If we fail it could be a bad start and a blow to the whole thing."

Diaman Tech has until 31March to raise the €147,000 it's seeking.  Right now, according to the company's profile on Unicaseed, one institutional investor is reviewing the offer. Bernardi is crossing his fingers — like the hundreds of other Italian startups that share his dream and are putting their hope in the crowd.  

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