Crowdfunding in the Human-to-Human Economy: Web 2.0 Based Finance for Jobs and Growth

October 1, 2015

Issues and problems

The financial system has over the last decades increasingly been characterised by intermediation. This may at first glance be interpreted as a symptom of further professionalisation; indeed, the division of labour has been reaching out to the service sectors as it has to the real economy as a whole, and for good. More complex regulatory environments and an increased focus on risk management in times of temporary if not repetitive crises have reinforced this trend. As long as investors, including retail investors, enjoyed positive rates of returns, and as long as a – from a societal perspective; ie on average and not individually – acceptable percentage of projects and companies obtained sufficient financial means to work with, this trend was uncontroversial and as such a political non-issue.

These times are history. Once rates of return in traditionally ‘safe’ investments approached the flat line that separates investors’ life from death, and as soon as SMEs and start-ups – which are SMEs without a track record, ie the worst there is from a risk-aversion perspective – started flagging access to finance as one of their most constraining bottlenecks,[1] the whole system became subject to debate, not only by anti-market pockets of society arguing from higher moral grounds by default but also in more reasonable quarters.

Since then, former side-issues, such as the cost-benefit-ratio of all sorts of financial intermediaries, have turned into meticulously scrutinised factors affecting decisions on both sides of the market. This discussion has swiftly translated into more thorough reflections on the role of intermediaries as such. Obviously, the more intermediaries there are, the more costs, intransparency and conflicting interests emerge, which creates principal-agency problems: intermediaries get paid to take care of other people’s money without having those people’s preferences (certainly a big field for lawyers in terms of contract design).

Fuelled by an extended financial and economic crisis, the feeling that the past system has stopped delivering goodies has become ever stronger, resulting in political disenchantment and ultimately giving rise to a call – naive and purist at times but nonetheless with increasing force and, yes, justification – for a return ‘back to basics’. This is where the human-to-human economy kicks in, which in this specific context translates into crowdsourcing and, in financial market terms, crowdfunding.

Crowdsourcing and crowdfunding –terms and characteristics

Crowdsourcing means acquiring services or knowledge by inviting contributions from a large group of people, especially from an online community. The internet provides a particularly good venue for crowdsourcing since individuals tend to be more open in web-based projects where they can be more easily involved as well as feel more comfortable sharing ideas with others. As such, crowdsourcing implies outsourcing tasks to a geographically dispersed group of people in a Web 2.0 environment. In practice, crowdsourcing systems are used to accomplish a variety of tasks. For example, the crowd may be invited to develop a new technology or design, develop apps or other tools, or help analyse very large amounts of data. 

Crowdfunding shares many features of the swarm intelligence described above, but specifically relates to finance. It is the practice of funding a project or company by raising monetary contributions from a large number of people, typically via the internet. Various types of crowdfunding exist, and usually a distinction is made between donation-based, reward-based, debt-based (often but not always referred to as peer-to-peer lending) and equity-based crowdfunding (crowd-investing).

Donation-based crowdfunding collects money for a specific project during a specified time period usually promoted through the internet and is as such a straightforward extension of traditional fundraising.  When crowdfunding campaigns offer contributors something in exchange, for instance an exclusive gesture of appreciation or a product that was developed and produced with the funds raised, this is referred to as rewards-based crowdfunding.

Other crowdfunding campaigns offer some form of financial return. Crowd-lending campaigners borrow money and promise to pay back the capital on specified terms with or (in exceptional cases) without interest. Such debt-based crowdfunding shares many features of traditional banking, but is not the same in terms of business model, perception and public acceptance. Equity-based crowdfunding – usually the most complex and, from a regulatory perspective, challenging type – can take different forms, including profit-sharing and securities-based crowdfunding.[2]  Such crowd-investing allows investors to become co-owners and at times ultimately entrepreneurs themselves.

The steep rise of crowdfunding in recent years[3] can be attributed to several factors, including the already mentioned persistent shortage of funding, notably for start-ups and SMEs with a non-mainstream business model. However, relying on traditional explanatory patterns – ‘the emergence of yet another form of finance that complements what is already there’ – would underestimate the potential of crowdfunding, and it may even place it in the at times awkward companionship of new models of finance that look appealing at first glance but may be dubious in terms of professionalism, investor protection and sustainability.

It should therefore be expressly noted that such risks do not apply to crowdfunding if educated investors meet entrepreneurs that combine business skills with social competence. Precisely this social interaction adds value beyond that achieved by other forms of finance, and it turns crowdfunding into the financial branch of the Web 2.0 revolution. Let us take a look at how this works in order to understand where the benefits for the human-to-human (H2H) economy emerge.

The H2H economy

The H2H economy is a so far ill-defined term, but the concept is intuitive. The branding H2H originated from applications in marketing. For example, Bryan Kramer summarised the core principles as follows: ‘Businesses do not have emotion. People do. People want to be a part of something bigger than themselves. People want to feel something. People want to be included. People want to understand.’[4] This is a rephrasing of very ancient – yet in no way obsolete, rather to the contrary – forms of trading at local level in collaborative, small-scale societies, the relevance of which for today derives from applications in a Web 2.0 based environment. These applications enable a completely novel approach to (inter)act locally with tools designed for global use and, as a result, empower a much larger group of individual economic agents than ever before to reclaim many of those tasks previously entrusted to financial intermediaries. 

It is worthwhile briefly expanding on the nature of this Web 2.0 based environment, because its emergence perfectly reflects the classical insight that any such disruptive technology evolves in three phases. There is a trial and error phase in which the technology emerges and proves its merit on a (niche) market. Then there is an extension in application and range, often in ex ante unpredictable contexts, driven by a desire to reach out and a curiosity to test the limits of what is feasible. And, finally, there is a transition into mass application, which makes even the most global technologies unfold their biggest socioeconomic effects locally. 

This latter observation should not come as a surprise. After all, human beings have their strongest interactions in their local environments, and whatever technology exists is thus downsized and reshaped to unfold benefits within a specific, i.e. small, geographic context. We listen to radio on the internet, but it is local stations we listen to. We use fora and chatrooms that have no geographic boundaries, but we mostly communicate with people we know or have met in person, in a local context. It is only recently that Web 2.0 applications have massively reached the third phase, and we are now starting to observe the first results.

The benefits of crowdfunding

All of this explains not only why crowdfunding has emerged, but it also explains why crowdfunding is the strongest challenge to traditional finance ever. Crowdfunding is the missing link that connects people, allows them to interact, enables them to give unperturbed expression to their preferences and puts them into direct control of their own economic activities, be it on the supply or demand side.  By making use of Web 2.0 based applications, crowdfunding combines the traditional and the modern world: It creates value in purely financial terms, but it does much more on top. In essence, the benefits can be summarised along six categories. 

1.      At the outset, crowdfunding is a very flexible and easily accessible form of finance. Access to finance across the EU for a number of years has been and will remain one of the most pressing problems for SMEs. With few exceptions in a very limited number of EU countries, SMEs have been reporting deterioration in access to bank loans, public financial support, the supply of trade credit and the willingness of investors to invest in equity. Especially for small-scale projects, the demand for finance is often not met by traditional sources of finance, and increasing risk aversion as well as continuously high administrative burden in the financial sector worsen this situation. Crowdfunding can offer efficient and effective solutions, as it matches contributors and investors directly with the projects in need of funds, mainly in the early stages. 

2.      Crowdfunding reaches beyond the traditional segments of the economy. Some non-mainstream segments, such as social enterprises or the cultural and creative sector, in practice do not find many sources of finance tailored to their needs. There are many reasons for this, such as their specific focus on social and non-profit objectives, the dependence on intangible assets and the high uncertainty of market demand for their services and products. In such situations, crowdfunding is often the only way to turn ideas into results. 

3.      On top, crowdfunding offers concrete benefits beyond access to finance. It allows for additional market testing and constitutes an interesting marketing tool, which can help entrepreneurs acquire relevant knowledge of customers or media exposure. Crowdsourcing can also vastly speed up production and distribution as well as consecutive quality checks and improvements. 

4.      Moving forward into the more exciting world of Web 2.0 applications, crowdfunding is perfectly suited for the digital economy. While crowdfunding has existed before the internet, online services and direct interaction between the supply and demand sides vastly increase the potential for crowdfunding and, in a broader sense, crowdsourcing. This has positive effects for even the most traditional sectors. For example, innovative farmers in rural areas are increasingly taking up ideas from crowdsourcing to tap knowledge and better match supply and demand as thus avoiding loss of income by minimising supply chains. 

5.      Very importantly, crowdfunding promotes entrepreneurship. In most EU countries, there exists a lack of entrepreneurial spirit to a degree that endangers the creation of growth and jobs at a large scale. Crowdfunding not only promotes the classical types of entrepreneurship, it also taps resources that have so far been unused. For instance, it is a perfect way to introduce the idea of entrepreneurship to school children and students. Moreover, entrepreneurs who have failed once but take a second chance and start new businesses are on average more successful than start-ups by first-time entrepreneurs: they grow faster, and they create more jobs. They do however face an immense problem in accessing finance, as traditional sources of finance focus on their negative track record and stigmatise these entrepreneurs. A crowd community that is more open and forward-looking instead analyses the merit of the project as such and focusses on its future prospects. This makes crowdfunding attractive to innovators that already have expertise but find it hard to secure bank loans. 

6.      Last but certainly not least, there is a fundamental value inherent in crowdfunding that goes far beyond the merits so far discussed. Crowdfunding has functions that benefit society as a whole. By cutting short the ever longer chain of intermediaries that populate the space between the supply and demand sides of markets, crowdfunding creates a dynamic of interaction and change that is not seen in other parts of the financial sphere. This is not only market based interaction par excellence, it is a direct result of the fact that crowdfunding is thoroughly and intrinsically democratic. It empowers everyone – not only traditional investors – to allocate their own funds, knowledge and ambition according to their own preferences and not the preferences of those that pretend to know better. 

This last benefit may well be the most important benefit of all. It is where textbook notions of the democratic organisation principles underlying a market economy fall into their perfect place within the 21st century context of Web 2.0 based marketplaces. This is precisely what the H2H economy is about.


Crowdfunding is not just any new form of alternative finance. It is much more. It finally puts those into the driving seat who should have been there in the first place when we speak about a market economy: the individual economic agent, who operates within his local network. The EU comprises more than 500 million such economic agents, and in a functioning Internal Market, their potential is second to no other economic area in global comparison. To help them all exploit their potential in the H2H economy is the concrete task ahead at all levels of society. 

On 30 September 2015, the European Commission presented an Action Plan on Building a Capital Markets Union. In its first chapter, the assessment of measures and next steps to spur growth and to finance innovation, start-ups and SMEs in the EU starts with a discussion of crowdfunding and a commitment ‘to enable the development of this new funding channel across the Union.’[5] This is a task that requires input at many levels of society, primarily by those who combine Web 2.0 literacy with H2H socioeconomic competence. It is also a call to action for each profession, not only economists and financial experts but also, importantly, the legal community – after all, economic activity can only prosper if it is based on and guided by a reliable yet dynamically evolving legal framework that is in harmony with the fundamental values of society. 

As such, there is a task at hand that cannot be outsourced to any intermediaries: it is the individual that counts, each and every one, in his specific context. Every crowdfunding project in the H2H economy is a swarm activity in a socioeconomic context. The same applies on the meta level of making crowdfunding a success in a democratic, market based society. 

Joachim Schwerin is Principal Economist at European Commission, DG Internal Market, Industry, Entrepreneurship and SMEs. All views expressed are his own and do not necessarily represent those of the European Commission as a whole.



European Commission (2015): Communication on an ‘Action Plan on Building a Capital Markets Union’, COM(2015) 468 final, 30.09.2015.

European Commission (2014a): Communication on ‘Unleashing the Potential of Crowdfunding in the European Union’, COM(2014) 172 final, 27.03.2014.

European Commission (2014b): ‘Survey on the access to finance of enterprises (SAFE)’,

Kramer, Bryan (2014): ‘There Is No More B2B or B2C: There Is Only Human to Human (H2H)’, (accessed on 29 September 2015).

Reuters (2014): press release ‘Crowdfunding Market Grows 167% in 2014: Crowdfunding Platforms Raise $16.2 Billion, Finds Research Firm Massolution(R)’, (accessed on 30 September 2015).

[1] Cf. European Commission (2014b), p 4.

[2] For the definitions and concepts of crowdfunding cf. European Commission (2014a), p 3ff.

[3] Globally, crowdfunding platforms raised $16.2 billion in 2014, which is a 167% increase over the $6.1 billion raised in 2013. Source: Massolution ‘2015CF Crowdfunding Industry Report’, quoted in Reuters (2014).

[4] Kramer (2014).

[5] European Commission (2015), p. 7.