17 October 2012
It was always tough for the start-up or small business owner to raise cash. It became even more so after venture capitalists and banks became super-cautious after the financial crash of 2007 wreaked havoc around the world.
A lot of nascent businesses, however, have sat up and taken notice of crowd-funding, which has proved fruitful for non-profit organizations and causes in the past. Practitioners are now taking this model and adapting it for modern market-places.
Welcome to crowd-investing.
According to Crowdsourcing.org, crowd-funding platforms raised almost USD 1.5 billion and funded more than one million projects in 2010. The site also predicts that there will be an estimated 300% growth in equity-based crowd-funding in 2012.
Crowd-investing is being taken seriously. President Obama has in fact written it into law with the JOBS (Jumpstart Our Business Startups) Act of April 2012. This act allows small businesses and start-ups to raise up to USD 1 milllion a year by allowing numerous small investors to give them cash in exchange for a stake in the business. Signing the act, Obama called the model "game-changing".
Before the JOBS Act, only accredited investors forming just 2% of the US population took advantage of such investing. According to Crowdfund Capital Advisors, if the US population invested 1% of their savings using this model, more than USD 300 billion will be delivered into the American economy - without any US government spending.
The concept has quickly made its way into the Middle East and North Africa as well, with the launch of crowd-investing company Eureeca. Former investment banking friends Christopher Thomas and Sam Quawasmi noted the constant need for business finance and so developed the model for this region. Companies have three months to raise the funds they need online after going through a vetting procedure. If they don't raise the funds in that time, investors get their money back.
"Ultimately, we think that crowd-investing is a great model for fundraising for businesses. [It's] unlike traditional methods of raising money through bank loans or venture capital where there's a binary answer - they say yes or they say no to you. If they say no you're unlucky and off you go. If they say yes, you've raised your money," Thomas told Zawya.
"What crowd-investing does is re-addresses the balance of power that's currently in traditional funding methods: 'he who holds the gold makes the rules'. Investors really take a very significant chunk of your business, whereas crowd-investing is much more democratic," he said.
Having less of your business owned by one or two large shareholders ultimately leaves the company in charge, giving the investors less voting rights and less power over the business, Quawasmi added.
Crowd-investing is still very much in its infancy, so it's difficult to see any trends emerging now. However, Thomas said: "A year or so ago the vast majority of investors invested in one business only... they basically invested only in that first-level connector. Whereas now the trend is investors investing in many more businesses on the same site. Individual investors are now seeing the value of using these methods with defined viral investments rather than just helping out their close connectors," he said.
This seems to be a no-lose situation. But what difficulties could arise in this region?
Dr Khalid Maniar, founder and managing partner at business consultancy Horwath MAK, said there could be problems trying to actually give investors the cut of the business they've invested in online.
"It could certainly add more glamor and it could certainly add more opportunities, both for the investor and the people who want to divest. [However], it won't work for companies registered in the Middle East, because it requires a lot of physical documentation and process in order to transfer shares. That will be very, very difficult for companies registered here," Dr. Maniar told Zawya.
"The idea is excellent: how far it can be implemented, that is the question."
Dr Maniar also raised the issue of company data that are readily available in the West, but "are not readily available here; neither can they be relied upon". Investors here, he continued, "are very, very conservative".
Despite these aspects, Thomas of Eureeca is confident. "It will be a success. Mark our words - crowd-investing is going to be the de facto mechanism by which people raise funds in the future. It's here to stay."
Related story: Eureeca.com's crowd-investing system is designed for MENA start-ups
© Zawya 2012
It was always tough for the start-up or small business owner to raise cash. It became even more so after venture capitalists and banks became super-cautious after the financial crash of 2007 wreaked havoc around the world.
A lot of nascent businesses, however, have sat up and taken notice of crowd-funding, which has proved fruitful for non-profit organizations and causes in the past. Practitioners are now taking this model and adapting it for modern market-places.
Welcome to crowd-investing.
According to Crowdsourcing.org, crowd-funding platforms raised almost USD 1.5 billion and funded more than one million projects in 2010. The site also predicts that there will be an estimated 300% growth in equity-based crowd-funding in 2012.
Crowd-investing is being taken seriously. President Obama has in fact written it into law with the JOBS (Jumpstart Our Business Startups) Act of April 2012. This act allows small businesses and start-ups to raise up to USD 1 milllion a year by allowing numerous small investors to give them cash in exchange for a stake in the business. Signing the act, Obama called the model "game-changing".
Before the JOBS Act, only accredited investors forming just 2% of the US population took advantage of such investing. According to Crowdfund Capital Advisors, if the US population invested 1% of their savings using this model, more than USD 300 billion will be delivered into the American economy - without any US government spending.
The concept has quickly made its way into the Middle East and North Africa as well, with the launch of crowd-investing company Eureeca. Former investment banking friends Christopher Thomas and Sam Quawasmi noted the constant need for business finance and so developed the model for this region. Companies have three months to raise the funds they need online after going through a vetting procedure. If they don't raise the funds in that time, investors get their money back.
"Ultimately, we think that crowd-investing is a great model for fundraising for businesses. [It's] unlike traditional methods of raising money through bank loans or venture capital where there's a binary answer - they say yes or they say no to you. If they say no you're unlucky and off you go. If they say yes, you've raised your money," Thomas told Zawya.
"What crowd-investing does is re-addresses the balance of power that's currently in traditional funding methods: 'he who holds the gold makes the rules'. Investors really take a very significant chunk of your business, whereas crowd-investing is much more democratic," he said.
Having less of your business owned by one or two large shareholders ultimately leaves the company in charge, giving the investors less voting rights and less power over the business, Quawasmi added.
Crowd-investing is still very much in its infancy, so it's difficult to see any trends emerging now. However, Thomas said: "A year or so ago the vast majority of investors invested in one business only... they basically invested only in that first-level connector. Whereas now the trend is investors investing in many more businesses on the same site. Individual investors are now seeing the value of using these methods with defined viral investments rather than just helping out their close connectors," he said.
This seems to be a no-lose situation. But what difficulties could arise in this region?
Dr Khalid Maniar, founder and managing partner at business consultancy Horwath MAK, said there could be problems trying to actually give investors the cut of the business they've invested in online.
"It could certainly add more glamor and it could certainly add more opportunities, both for the investor and the people who want to divest. [However], it won't work for companies registered in the Middle East, because it requires a lot of physical documentation and process in order to transfer shares. That will be very, very difficult for companies registered here," Dr. Maniar told Zawya.
"The idea is excellent: how far it can be implemented, that is the question."
Dr Maniar also raised the issue of company data that are readily available in the West, but "are not readily available here; neither can they be relied upon". Investors here, he continued, "are very, very conservative".
Despite these aspects, Thomas of Eureeca is confident. "It will be a success. Mark our words - crowd-investing is going to be the de facto mechanism by which people raise funds in the future. It's here to stay."
Related story: Eureeca.com's crowd-investing system is designed for MENA start-ups
© Zawya 2012
