Dubai: Crowdfunding can be a suitable option for those looking to invest small amounts in startups, particularly in an economy where funding is hard to find, speakers at the ArabNet Digital Summit said on Sunday.

Crowdfunding refers to the use of relatively small amounts of capital from a large number of investors to finance business ventures of startups or more established businesses. Crowdfunding or crowdsourcing can be employed by individuals who don’t wish to invest large amounts of capital or investors seeking to diversify their portfolios.

In 2012, crowdfunding websites helped companies and individuals worldwide raise $2.7 billion from members of the public, as per industry data. This figure is expected to increase to $5.1 billion in 2013.

The process of securing funding usually entails a business setting a funding goal, a set amount it is looking to raise, according to crowdfunding website Eureeca.com. The business can then apply to have its proposal listed on the website by uploading required documentation. After a due diligence check is conducted by a third party firm to prevent scams or fraud, the proposal is approved, and the company has 90 days to raise the target funds from the crowd.

As many of the business ventures on crowdfunding websites are pitched by startups, investors need to be aware of the risks associated with investing in them. “We all know that startups go bust,” said Darren Westlake, CEO of crowdfunding website CrowdCube. “The risk is that people don’t understand that.”


Marketing

It is not enough to simply put forward a proposal on a crowdfunding website; it should also be marketed to potential investors. “Most people are surprised that crowdfunding isn’t just flipping on a switch and getting investment,” said Christopher Tyrell, board member of the Australian Small Scale Offering Board. Crowdfunding can, however, be a valuable marketing tool as well, by providing businesses with an opportunity to engage with investors and customers and solicit their feedback and opinions via discussion forums. “It’s almost like a way of conducting marketing research,” Westlake said. “It’s a great way of engaging the crowd to improve your business or product.”

Crowdfunding companies earn by deducting a fee out of the funds generated. “We take 5 per cent of the funds raised,” Westlake said. “If the company doesn’t raise the money, we don’t get the money, nobody gets charged.”

Eureeca founder and CEO Christopher Thomas said his company followed an all-or-nothing business objective, in which an investor would either get all the money raised or nothing at all should he or she fail to reach the target amount. He described it as a way of protecting investors and making sure those looking for investment had a feasible business plan. “You need to persuade enough members of the crowd that your assumptions are viable.”

Funding void and job creation:


Crowdfunding could be a way to boost employment by means of enabling small or medium enterprises (SME’s) to flourish. Crowdfunding could also be a way for startups to get capital they can’t secure from other sources.

“VC’s aren’t interested in small businesses. There’s a massive funding void that currently exists,” Christopher Thomas told Gulf News, commenting on how investing in small and medium businesses could increase employment. “There’s a demographic crisis here in the Middle East that’s only solved through job creation. How do we create jobs? We support SMEs.”

Investments widely vary on these sites. Eureeca has seen investments ranging from $210 to $51,000, with an average investment of about $3,000, according to Thomas. Crowdcube, on the other hand, has an average investment of £2,427, according to its website.

“The overall perception of crowdfunding is immensely positive,” Thomas said. “People need this to happen.”

— The writer is an intern with Gulf News