Our SME expert offers his thoughts on raising capital via crowd funding and crowd-investing platforms.
SME corner: how effective is crowd funding?
Crowd-funding and crowd-investing platforms have ballooned in popularity over the past year. What is your assessment of raising capital in this manner? BD, Abu Dhabi
Fund-raising is perhaps one of the toughest challenges a business or community project faces.
Over the past few years the financial crisis resulted in a tightening of credit, making capital harder to access. These capital sources were often individuals, financial institutions or angel investors to whom the initiator pitched a project in the hope of funding. Often these sources were familiar and local to the initiator.
Technological advancement has transformed the way we communicate. Digital platforms have enabled online communities that offer national, regional and global networking opportunities. In my opinion leveraging online technology is a direct, open and far more “democratic” route to accessing capital.
A while back I read about The Dream Model Street School near Karachi, Pakistan. The school, started by a girl who fought for her own education and then went on to teach other children, was in need of funds to renovate and expand.
This project was listed on Catapult (www.catapult.org), a crowd funding platform for girls and women, and it raised US$58,000 before the funding close-out date. The hundreds of donors included children at schools across America, individuals and even celebrities who were attracted to the sheer tenacity of the initiator and transformational nature of the project. Catapult lists projects for girls and women all over the world, does not charge a fee and is transparent about how donor funds are disbursed.
Crowd-funding platforms attract members forming an online community of potential donors.
Usually a project initiator also has a social network, such as Facebook. These two globally connected online communities are a natural reservoir to draw capital for a project that just a few years ago might have struggled to find more than a few donors.
Crowd investing follows a similar trajectory. Platforms invite submission of business plans and legal documentation for vetting. Whether the initiator is looking to start a new business or expand an existing one they will need to build a compelling business plan to attract investors.
Often a short video presentation is also included to introduce the entrepreneur and his vision to investors. Once formalities are complete the project will be listed for a limited time on the crowd-investment platform. If the project’s investment total is reached by the cut-off date online investors will become shareholders. The platform will usually charge a service fee that might be a percentage of the funding raised and take care of all the legal formalities.
The part I find most interesting about these platforms is that the initiator can quickly gauge the success of a project by the audience it gets.
The audience are both stakeholders who have bought into the vision and also potential customers who can spread the word. A single project could have hundreds of investors or donors all over the world who communicate with the project initiator and receive regular updates via the crowd platform.
I believe crowd funding and investing have enormous potential to upset the world of traditional finance.
In the UAE, crowd-funding platforms have been around for a few years. Aflamnah (aflamnah.com), for example, is a forum for the Arab world’s independent film makers, scientists and innovators. Aflamnah lists the idea and then raises funds for the initiator for a fee. The initiator can provide rewards (such as a credit in their new film) to encourage donors.
Crowd investing is relatively new in the region and one such newcomer is Eureeca (eureeca.com). Eureeca has a services team in Dubai (and is officially registered in the Cayman Islands) and will consider any investment size that is feasible for crowd investing in return for equity in the venture. Eureeca also provides support services to the entrepreneur during the growth of the company.
Yunib Siddiqui started his first business in London at the age of 22. He is the chief executive and owner of Jones the Grocer in the UAE. He can be contacted at SMEbizCorner@gmail.com