Thursday, Dec 27, 2012
Equity crowdfunding and venture capital can be similar in that both provide money to help a business get off the ground and investors earn equity in return.
However, one of the differences is that while crowdfunding accepts small sums from many individuals, venture capital (VC) involves larger funds from wealthy investors who are looking for higher returns.
By its very nature, venture capitalism is restricted to the rich who have several years of experience running a business, explains Sam Quawasmi, managing director and co-founder of Eureeca. Crowdfunding, on the other hand, offers anyone, regardless of their wealth, the chance to invest a small amount to make a business idea happen.
“Venture capital investors often invest large sums of money in exchange for a majority shareholding in the business and operating or decision-making rights. With crowdfunding, the minimum amount of investment can be relatively low and the pool of investors often much larger,” says Quawasmi.
“In equity crowdfunding, the equity holding is spread over several investors and therefore, investor demands are not as great. While it is up to the individual entrepreneur to provide decision-making or voting rights, this is not a requirement for getting funded via crowdfunding,” he adds.
Venture capitalists or financial institutions follow a funding process similar to what is done online by crowdfunding, where business ideas are vetted, discussed and reviewed. “However, the process [in crowdfunding] is more democratic as it engages the wisdom of a large number of people and is much more transparent,” says Quawasmi.
Steve Gregory of Holborn Assets says there are not enough VC investors to meet demand in the region. “Most small companies looking for funding are unprepared when making approaches to the market and lack organisation and preparation in making their cases.”
While VC investing may provide great returns, Gregory says it is “unlikely” that he would recommend it to retail investors. “Higher risk often comes with higher rewards… I might point them in the direction of competent VC advisors.”
The VC industry in the region is still in its nascent stage, but it’s showing signs of positive growth. According to a report released in August by the Middle East and North Africa (Mena) Private Equity Association, venture capital activity in the region climbed by 28 per cent last year.
The report said that 120 VC deals were closed from 2009 to 2011, compared to just 62 from 2006 to 2008. Last year alone, 46 deals were completed, up from 36 in 2010. Most of the deals were, however, registered in Morocco, which captured 57 per cent of the transactions, followed by Egypt and Lebanon, both registering nine per cent.
The report said venture capital has not taken hold in Qatar, while VC firms in the UAE tend to focus on region-wide investment opportunities and not just those in the country. The UAE environment is relatively difficult for cash-strapped startups considering the high cost of living and lack of engineering talent from local universities.
However, the report said 2012 would also end well for the VC industry in the region, and for the UAE specifically.
By Cleofe Maceda Senior Reporter
Gulf News 2012. All rights reserved.
