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It is time for the small investor to step up

Friday, Aug 17, 2012

Dubai: The small investor finally gets a chance to have a say in launching a small business. As for prospective entrepreneurs, it offers them opportunities to tap funding sources other than high-cost bank finance or dip into their own resources. In short, welcome to the still rarefied world of small stakes funding and the very space that a new start-up — Eureeca — is going after.

The portal, to launch next month, will offer a platform for businesses to pitch their ideas and which can then be monetised through the support of outside investors, starting from as low as $100. The investment deals are explained in the term-sheet associated with each business pitch.

“Eureeca does not set any limits on the extent of equity or investment for a business pitch,” said Christopher Thomas, co-founder and a former investment banker. “It’s up to entrepreneurs to decide the total funding required and the equity stake they will offer to investors.

“Once on the platform, investors can interact with the business pitches, pose questions to the business proprietor and indicate which ideas he or she most likes.”

While all of this sounds even-handed, isn’t it the case that too many investors coming in at the launch phase — as opposed to one or two strategic investors — might actually prove detrimental? Not surprisingly, Thomas does not buy this argument.

“Gaining investors from a crowd [offers] the potential of a ready-made distribution network and several brand ambassadors who will buy their product or use their service and promote it through their social networks,” Thomas added. “Such a broad investor base will also provide invaluable feedback in a way that one large investor cannot. This feedback is essential for the success of any business… and in particular start-ups.

“Although investments of $100 are certainly modest, they are by no means random. In the world of investment banking small investments are made to test the performance of a business prior to making a larger investment and this is part of the due diligence process.”

Eureeca evaluates the authenticity of each business application. The businesses then undergo a due diligence process to ensure compliance with ‘Know Your Client’ regulation, for which they pay $250. Once this is completed, businesses provide a refundable deposit to Eureeca of 2 per cent of their funding target, after which the business pitch is ready to go onto the website.

Each business pitch is uploaded on the Eureeca site for a period of 90 days unless the funding target is achieved before the duration. During the period, entrepreneurs are encouraged to market their business pitch on the website through videos, integrated social media tools and other methods.

On its part, Eureeca does ensure that prospective investors go through a vetting process, which is done through a third-party. They are required to offer evidence of their credentials. At some point in the future, the portal also intends to offer a premium service for by limiting the public knowledge of entrepreneur concepts and “upload their business pitch into a restricted area of the website for closed room funding,” said Sam Quawasmi, who founded the business with Thomas.

But what’s in it for the portal? It derives revenues from managing the platform, and linked to the total funds raised for a fully subscribed business concept.

The partners — who used their personal savings as well as “sweat equity’ deals with partners to launch the business - expect to attain break-even next year. “However, our priority right now is giving investors an alternative to the sometimes unprofitable traditional investment opportunities open to them,” said Thomas.

His words could yet strike a chord with those start-ups saddled with the high cost of finance.

By Manoj Nair Associate Editor

Gulf News 2012. All rights reserved.

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