Crowdfunding, the lifeline of small businesses
Crowdfunding is an awakening force in fundraising for micro-businesses, startups, social causes and social developments. Designed for the collection of many small contributions via a website, crowdfunding has proven to be a lifeline for many. It presents bite-sized investment opportunities for the small investor who is willing to invest a modest sum in return for a reward.
Crowdfunding is nothing new. It has been around for years but was called by a different term that was in vogue at that time and was carried out on different platforms. Some examples include interest schemes in Arowana fish farming in Malaysia and investment schemes in overseas properties through companies such as Jardin Smith International and Walton International.
The first crowdfunding project, a true example of crowdfunding in the 21st century, was that of American jazz musician Maria Schneider,
who raised about USD130,000 from her fans to finance the production of her album “Concert in a Garden” via ArtistShare, a website for musicians to source donations from fans to produce digital recordings or to organise a concert. Her successful campaign led to the birth of many reward-based crowdfunding platforms such as Kickstarter and Indiegogo.
This alternative and revolutionary channel of raising capital has indeed helped those who have been turned away by financial institutions because of their inability to meet lending criteria. Now with the growing phenomenon of crowdfunding, small enterprises, SMEs and startups will not have to pin their hopes on government grants, angel investors or venture capitalists when the banking route fails.
Studies done by the Asian Development Bank revealed that only 18.7 percent of all bank loans in Southeast Asia were granted to SMEs, a dwindling trend since the financial crisis in 2009. ADB also reported that a whopping nine million small businesses have limited access to financing. In the event that these nine million SMEs jump on the crowdfunding bandwagon, imagine the waves they will make in the crowdfunding industry and their countries’ economic growth.
Crowdfunding is certainly a realistic solution to the financial woes of SMEs and entrepreneurs. It helps this group of underserved people start a venture or expand their business, and ultimately contribute to the country’s GDP growth.
Crowdfunding is a game changer in the financial world as it democratises finance. Money lending is no longer the sole purview of financial institutions. The progress of financial technology (fintech), the increasing penetration of mobile devices and big data, the growing popularity of social networks and the ease and speed of alternative fundraising have changed the way business is being done today.
It has disrupted the conventional banking system,
and banks that are feeling the threat have started to explore how they can get a share of this rapidly-growing pie by collaborating with peer-to-peer (P2P) lending platforms.
The crowd on social networks, in the form of retail investors, are willing to invest in a small way in projects that are of interest to them. These investors can take their pick from the myriad crowdfunding portals and select campaigns that promise a reward, pre-sale of products, equity purchase or P2P lending. This form of financing works well for the small entrepreneur as he does not have to worry about the collaterals he would have to mortgage to the bank, high interest rates or his ability to repay the loan.
Massolution’s 2015 Crowdfunding Industry Report revealed that the global crowdfunding industry raised USD6.1 billion in 2013. In 2014 the growth accelerated by 167 percent to record a figure of USD16.2 billion. The report projected another year of unprecedented growth in 2015, as the industry is expected to raise more than double of what it did the previous year to hit more than USD34.3 billion globally.
Clearly, an increasing number of micro-businesses and SMEs are turning to this alternative form of financing that has taken the world by storm and given the banks a run for their money. This growing force will soon see developing economies catching up with the developed world.
Allied Crowd’s January 2015 report stated that the developing nations’ share of the huge crowdfunding pie is just USD430 million, but it is slated to grow by 53 percent. Once the underserved or unbanked group picks up on crowdfunding, the growth will be explosive.
The global real estate sector has also turned to crowdfunding and is now one of the fastest-growing segments of the booming crowdfunding industry. According to the 2015 Massolution Report, the sector raised over USD1 billion globally in 2014 and the outlook for 2015 was expected to triple to USD2.57 billion. Crowdfunding has reshaped the way individuals find and invest in properties.
Islamic crowdfunding is another growing trend. It focuses on important Islamic values such as profit and loss sharing, building online Islamic communities and promoting ethical and social responsibility. For the industry to mature and grow, both Muslims and non-Muslims must participate to create an ecosystem that is Shariah-compliant or ethics-based, and that will benefit self, humanity and society as a whole.
Islamic crowdfunding took time to get off the ground but in the last two years,
many Islamic crowdfunding platforms have emerged. Amongst them are Ata Plus in Malaysia, Club Ethis and Kapital Boost in Singapore
and several others in Indonesia, the Middle East, Europe and the US.
The World Bank predicted that the Muslim world may be one of the first markets where crowdfunding investment can prove to be a game-changer. Could this be the force to drive Muslims to create an ecosystem that is Shariah-compliant?
Success of Crowdfunding
Harnessing the powers of fintech and social networking has unleashed a potent new force in the funding ecosystem that will benefit micro-businesses and SMEs.
Crowdfunding has worked well for the music industry, film, video and photography projects, startups, disaster relief and social causes. It has also proved to be highly successful for real estate.
In the wake of the 7.8-magnitude earthquake in Nepal in April 2015, hundreds of individual campaigns raised relief funds amounting to USD23 million within 60 days on platforms like Crowdrise, Indiegogo, GoFundMe and GlobalLiving. Campaigns are still running to raise funds online for the restoration and rebuilding of the affected areas in Nepal.
Possibly one of the biggest success stories is that of Pebble Technology, which ran two campaigns and raised a total of USD30 million. Its campaign for Pebble Time hit its goal of USD500,000 in just 17 minutes, breaking the record for the fastest campaign to be funded.
The Future of Crowdfunding
The crowdfunding industry has made giant strides in the last three years and is set to grow exponentially worldwide. On the Asian front, the 2015 Massolution Crowdfunding Industry Report showed that Asia contributed much of the tremendous growth in the global industry. It accounted for USD3.4 billion, which meant it was only surpassed by the US.
Crowdfunding is slowly gaining traction in Southeast Asia. Although the industry is still in its infancy, the governments of Singapore, Indonesia and Thailand have initiated regulatory frameworks for the industry, which bodes well as retail investors will now have more confidence.
In Malaysia, six equity crowdfunding platforms (ECPs) have been licensed by the Securities Commission last June, making Malaysia the first country in Southeast Asia to do so. The six ECPs are Alix Global, Ata Plus, Crowdonomic, Eureeca, pitchIN and Propellar Crowd+.
The Malaysian landscape for crowdfunding is set to grow and will be fuelled by the mushrooming of startups and SMEs, the acceleration of social and mobile-savvy Malaysians, the increased use of e-commerce and e-finance and the high investor optimism. Malaysia provides a ripe platform for growth, having the largest number of tech IPOs n Southeast Asia, and is home to the fastest-growing startups in the region.
The World Bank also estimated that crowdfunding would reach USD90 billion by 2020. It looks like crowdfunding is not going away anytime soon.
The picture that I have painted may seem rosy. However, it is not as easy as it looks if we were to examine the crowdfunding process further. There is a lot of hard work involved. One has to find the right platform, develop a strategic marketing campaign, share the story behind the concept to garner ‘buy-in’ and decide on the kind of rewards to be given.
Crowdfunding has proven to be successful with the many who did due diligence, had a product or concept that is wanted and put in the hours to promote the campaign. But what about those who failed? They probably did not fully understand how crowdfunding works. Did the campaign lack detailed information because the entrepreneur in question was worried about his idea being stolen? Was the product not of interest to retail investors? Was the chosen platform suitable? Did they actively market and promote their product on social network? Did they set a high enough reward level to draw the investors?
Here in Malaysia, the nascent crowdfunding industry is fraught with challenges, though opportunities abound. At the moment, funds can only be raised through the six licensed ECPs, where people invest in an opportunity in exchange for a small stake in the business, project or venture. The Malaysian public is not yet educated enough and is sceptical about such a mode of investment. Therefore the industry is still looking at venture capitalists and angel investors as the main players, making it difficult for the crowdfunding industry to take off in the immediate future.
More needs to be done to educate and to cultivate a new mind-set among retail investors. The World Islamic Economic Forum (WIEF) Foundation recognises the value of crowdfunding and its inherent benefits to micro and small businesses, and also the challenges faced by the industry. As such we have incorporated the issue of crowdfunding into its discussion groups, programmes and initiatives in an effort to bridge the gap.
This topic was explored at the 12th WIEF, themed Decentralising Growth, Empowering Future Business, in sessions on Equity Crowdfunding and Startups at the IdeaPad. It was also a platform for startups to learn about equity crowdfunding and how it can help them raise funds.