Financing by the people

The crowdfunding craze continues to gain momentum overseas … But will it follow suit and take off here?
As crowdfunding expert and lead associate at Booz & Company Jihad Khalil points out, the phenomenon is not new — look back to 1885, when cash from over 120,000 Americans helped build the pedestal for the Statue of Liberty in the United States.

And today, digitised crowdfunding, a model of financing projects or ideas by individual contributions which originated in the US, is continuing to diversify and grow — as are the level of funds involved.

In 2012, the crowdfunding market grew more than 80 per cent by gaining over $2.7 billion in funds worldwide, a number expected to almost double to more than $5 billion this year, according to Khalil’s blog.

And it is no longer just the domain of films and other creative projects, with a growing shift towards funding start-ups and small businesses.

USA Today reported recently that American Olympians and athletes were now using the model, such as speedskater Emily Scott who raised nearly $48,000 in less than a week, while a technology project on one of the newer American sites, Indiegogo, recently set a record for funds raised, hitting about $11.5million early last week.

Meanwhile, US and German students had started using crowdfunding to finance their studies, while locals in the UK were turning back to private donations to revamp parks, playgrounds and public areas in response to cash-strapped municipalities and town councils slashing budgets, Khalil told Khaleej Times.

Why not in the Middle East?

So what about here in the UAE, and the wider Middle East region?

Searching some of the main sites in the Middle East — zoomaal.com and aflamnah.com for creative projects, and Eureeca, for equity investing — the number of current projects from Dubai are few.

What’s holding us back? Khalil said he was not sure how quickly project owners would get on board during the early stages of a project, given the fear of failure common here, compared to the US where people were more comfortable putting themselves out there and testing their ideas within their social networks.

“Unlike in the Middle East, failure is not a shame; it’s just a necessary (albeit painful) step on the road to success.”

However, the need and potential drivers were there, Khalil said.

Getting finance was becoming more and more difficult and expensive, especially for smaller businesses and entrepreneurs.

Many project owners and types such as social, humanitarian and arts projects could not afford “the exorbitant rates of micro-financing, let alone banks”, he said.

Meanwhile, the MENA region had one of the highest unemployment rates in the world — and in many other developed countries, this was one of the precursors to a spike in small business creation, he said.

Crowdfunding could push this along by supporting new ideas and initiatives as financing became more expensive, and, through the “wisdom of the crowd”, help to validate ideas before they even went to market.

There was also a “huge Middle Eastern market of philanthropic giving” which could be leveraged if platforms did the right things to appeal to these types of donors, he said.

However, project owners would have to come up with “their own local ideas based on specific local needs”, which fitted the local market and added value to a critical mass of backers in order to succeed, he said.

Risks and protection

And despite these positive indicators, there was no guarantee the crowdfunding model in its current format would work in the Middle East.

Examples of ideas that had not taken off such as the businesses similar to Groupon which “mushroomed a few years back” and were “now all reduced to a couple that adjusted their original approach” had showed the region there was room for failure if businesses did not make necessary changes quickly.

“So until the Arab platforms prove their regional worthiness and reach a critical adoption rate, nobody can pretend that crowdfunding has more than even odds in this part of the world.”

And the risks were aplenty — scams, broken promises and crowd disappointment.

However, given crowdfunding was a public platform which demanded a great deal of transparency from project owners, it also had the ability to “publicly fame or shame” any participant, and the reputational risk was large if they did not follow through once funded, he said.

Studies had also showed 90 per cent of the donors to successful projects were friends, family or part of the project owners’ extended social circle.

“Coming to the crowdfunding market as a first-time fundraiser in the Middle East will be extremely hard for those who do not have an actual backing or following in the real world and who don’t run their own parallel “offline” campaign… let alone (for) the scam artist or those with little commitment who will be quickly weeded out by the keen and connected crowd.”

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