Shekra, an innovative Shariah-complaint crowdfunding platform from Egypt, is making waves. It has just scooped a USD 50,000 finance initiative award at the inaugural Abu Dhabi Islamic Bank (ADIB) and Thomson Reuters ethics and innovation awards, and has been recognized for its support of SMEs by H.H. Sheikh Mohammad Bin Rashid Al Maktoum, UAE vice president and prime minister and ruler of Dubai.
Shekra promises to bridge the gap between microfinance and big venture capital while prioritizing ethics. Dr. Shehab Marzban, co-founder and managing partner of Shekra crowdfunding, explains what set Shekra on its course towards inclusive Shariah financing for startups.
"I and my main co-founder, Adel Boseli, have worked on a number of startups in Silicon Valley, Germany and Egypt. We identified some challenges present in setting up startups in the Middle East. There is no ecosystem, and a clear funding gap. That is why Shekra was founded in 2012 - to tackle projects too big for micro-finance and too small for private equity."
But crowdfunding is hardly a new phenomenon. Kickstarter has been around for a while, as have local variants. What makes Shekra different? "There are two elements where we are different. First, we are Shariah compliant. We focus on complying with Islamic traditions, and try to promote those ethics in the businesses we engage with. Second, we don't have the conflict of interest and fraud problems that some platforms might have because stakeholders aren't aligned. We vet the startups and work with them very closely to establish goals before we start crowdfunding. And we don't just charge commissions - we share risk by taking on a share of business equity. This aligns our long-term goals with those of the entrepreneur and the investors."
FAIR BUSINESS PRACTICES
Marzban explained how they engage with startups from the outset to avoid conflicts later. Their goal, he says, is to ensure a fair outcome for all. "In a typical crowdfunding platform, anyone can put their project up on the platform to solicit contributions. But we work closely with our startups. When they apply online, we have meetings, Skype calls, etc. to understand the details of their business. When we look into the business plan, we ensure they've considered ethical elements such as minimum wages, and that they're not looking to generate revenue from non-compliant, unethical channels of income."
Being compliant with the tenets of Islamic finance goes beyond a simple desire for ethical behavior - Marzban explained that Shariah compliance comes with a duty of due diligence.
"Typically, everyone considers crowdfunding and venture capital to be Shariah compliant by default because funding is equity based. But true compliance includes screening to ensure the line of business doesn't go against Islamic tenets. Also, the startup structure should be complaint with Shariah ideas of fairness - with risk and profits distributed evenly. So you're not, for instance, allowed to have preference shares."
Marzban wants Shekra to follow the Islamic spirit of creating social benefits, but says the service is appealing to Muslims and non-Muslims alike. "We tackle Socially Responsible Investment (SRI) requirements, and assess projects on the positive impacts they might have - such as job creation, etc."
Marzban is vocal proponent of ensuring that stakeholder interests are not pulling in different directions. That's one of the reasons, he says, that Shekra asks for equity as opposed to commissions. "A commission model always runs the risk of conflicted interest. You might put something on your platform that you don't see as promising but you want the commission. We wanted to avoid that. We wanted to gain the trust of the society of entrepreneurs. We wanted to tell them that we're not just interested in taking money from them but want to climb into the boat together."
Such an arrangement isn't entirely altruistic. Marzban thinks equity works better for long-term returns. "Instead of merely making an initial 7% on the money raised, we put ourselves in a position to generate more revenue as the startup does well because we've taken an equity stake."
IN FOR THE LONG HAUL
So Shekra is playing the long game. But that comes with downsides as well as benefits. "Of course, this means that you don't have ready cash available in the short-term. We consider Shekra a long-term investment, where we've put money in to optimize our processes to support businesses and grow with them. But we work with companies that might be high revenue generating in the future and will pay dividends."
Shekra's funding range generally reaches USD 200,000. The platform fields queries from people with business plans and also those without. After the necessary planning and strategizing is completed, Shekra comes to an advance agreement on the equity to be shared. Once that is finalized, the startup goes up on Shekra and is immediately accessible to interested investors looking to buy an equity share.
Shekra typically asks for a 10% stake of raised equity, paid evenly by the business owners and the investors buying in through the crowdfunding platform. Marzban explains the maths. "We typically take 10% of the raised equity for our services in linking SME and investors. So let's say the entrepreneur wants us to raise USD 200,000, which is 30% of their overall business value. We'll take 10% of that, which translates to a mere 3% equity stake in the total business. That's split 50-50 between the entrepreneurs and the investors buying into the business, which means we'll be given 1.5% by each side."
This 10% is not an upper limit, however. "If we're asked for additional services, such as working with them in a mentor capacity, or incubating them, we will then take extra equity," Marzban said. Shekra isn't just a funding platform. "We act as mentors, and have a lot of processes similar to VCs. But we do not have a funding structure. The money is pooled and put directly into the startup. We took the best practices from VCs and mixed and matched to create our model, which combines funding with incubation."
CONQUERING CHALLENGES
An organization with goals as lofty as Shekra's is bound to run into challenges. "There are challenges in the legal and regulatory environment. Today, we can operate only as a closed investor network, where money has to be put directly into the startup. We can't work as a clearing house, and can't pool the money ourselves. But we believe that success stories will help us change regulations in the future," he said.
Another challenge is the untutored nature of entrepreneurial talent. Marzban says educating entrepreneurs is essential. "You have good talent, but it needs business education and the ability to build teams through leadership. And a lot of startups that have come to us are either single-person led, which is a bit risky, or are teams based on friendships not merit."
Despite the hurdles, Shekra is going strong, and is looking to expand out of Egypt. "We are now working on having a presence in the Gulf region, because we get strong interest from investors in the GCC as well as the expat community. For us, Egypt was a pilot because the country has a huge talent pool. We now want to expand outwards, both in terms of investors and startups to be funded. We have startups applying online from Malaysia to Morocco. We haven't been able to support them till now, because honestly we're still a startup ourselves. But we're putting the right processes in place now," Marzban said.
Marzban has words of advice for entrepreneurs wanting to apply to Shekra. "If entrepreneurs are still young and haven't worked much in the industry, they'd probably need to go through education through other incubators. Engineers and technical people often lack business and teambuilding skills at the outset. Building a strong team is very important."
There's also room in the market for entrepreneurs wanting to set up new crowdfunding platforms, Marzban believes. "There is a clear funding gap all over the region, which clearly needs to be addressed. There are quite a few possible models for crowd funding that together can change the dominant role of banks. Crowdfunding is a much more inclusive, community-driven model that the region needs more of."
© Zawya BusinessPulse 2013
