The term ‘crowdfunding’ is defined as the use of small amount of capital from a majority of individuals to finance a new business venture. In simple terms, crowdfunding utilises the easy accessibility of vast networks of people via social media channels and other crowdfunding websites by bringing together investors and entrepreneurs. Crowdfunding has the potential to increase entrepreneurship by expanding the pool of investors from whom funds can be raised beyond the traditional circle of owners, relatives and venture capitalists.
Furthermore, it has created the opportunity for entrepreneurs to raise hundreds of thousands or millions of dollars from anyone with money to invest.
The Crowdfunding platform is for anyone who have a bright mind with creative ideas and are ready to contribute to investors. Investors can select from hundreds of projects and invest as little as $10. Crowdfunding sites generate revenue from a percentage of the funds raised, according to Investopedia.
A lot of crowdfunding projects are based on rewards; investors can participate in the product launch or receive a gift for their investment. For instance, the maker of a new soap made out of bacon fat sent a free bar to each of its investors. New video games are a popular crowdfunding investment for gamers, who are rewarded with advance copies of the game.
The popularity of Equity-based crowdfunding is growing as it allows startup companies to raise money without giving up control to venture capital investors, offering investors the opportunity to earn an equity position in the venture. Securities and Exchange Commission (SEC) regulate investments involved in equity-based crowdfunding ventures.
Jaques Bernard, Senior Investment Officer, iSCF Capital Limited, UAE said, “When we talk about crowdfunding 70% of the crowd is the institutional crowd. It is evident in this region lower equity is the result of smaller commodity process resulting in the supply which would favour crowd surfing platforms. Nowadays a lot of firms are participating in crowdfunding. In the non-profit area which is about 35 billion dollars of crowdfunding 8% went to donations which is very encouraging and a significant percentage as compared to traditional banking systems.”
Crowdfunding across the Middle East
The concept of crowdfunding started just a few years ago and is now spreading rapidly across the Middle East and in the UAE.
Nowadays, a lot of young entrepreneurs are launching projects across this region, attracting a majority of investors, who typically earn rewards or, sometimes, equity for the money they invest in new products, services or ventures. The number of online platforms that link project creators and their pitches to individuals has grown in recent years and now includes Yomken.com, Aflamnah.com and Eureeca.com, among others.
“Crowdfunding isn’t just the latest business fad to hit the Middle East,” Jason Best, the principal for Crowdfund Capital Advisors, wrote in a recent issue of Voices, a publication from the global consulting firm McKinsey. “In a region where capital markets remain underdeveloped (with limited venture capital and public offerings), it’s a powerful financing tool that could empower a new class of entrepreneurs and investors.”
Overall, the money raised by crowdfunding platforms was forecast to reach US$5.1 billion last year, crossing 81% since 2012, according to market data from Massolution, a consultancy that specialises in this market. While representative figures for MENA are hard to come by, according to experts the amount contributed to crowdfunding sites within this region has been rapidly growing — with fees to platforms sometimes running $100 per project, plus 6 to 7% in fees for money raised.
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