Contrary to popular perception, the idea of crowdfunding, whereby a large number of individuals can easily contribute to a proposed project simply by the click of a mouse, was not established through the Internet and social media. What is called crowdfunding today actually has its roots in 17th century Germany where a sort of pre-subscription model was used to finance the printing and publishing of books.
Past campaigns
Later, the idea spread to the US. In fact, the pedestal of the Statue of Liberty in New York was financed by a fundraising model similar to crowdsourcing. From the nineties onwards, crowdfunding was widely used in the music and movie industries, and a number of successfully crowdfunded projects led to the establishment of crowdfunding platforms, which used the internet to increase the participation of as many people as possible.
Today, there are some 500 crowdfunding platforms operating all over the world collecting money for small businesses, start-ups, entrepreneurs and the creative industry. One of the most popular sites, Kickstarter.com has — since its launch in 2009 — funded more than 50,000 projects with the participation of more than five million people in sectors as varied as films, music, stage shows, journalism, comics and books, video games and food.
The crowdfunding model is often seen as a democratic way of raising funds — without the need to tap into established financial networks, take traditional bank loans or rely on venture capitalists, private equity or family businesses. The worldwide volume of crowdfunding stood at around $5 billion (about Dh18.3 billion) at the end of last year.
Regional appeal
Interestingly, the model seems somehow tailored for the Middle East, both in terms of easier capital access for start-ups and its compliance to Islamic finance standards.
“Crowdfund investing is both timely and authentic,” says Aamir A. Rehman, Managing Director at Dubai-based Fajr Capital Advisors. “Timely because it helps address the need for entrepreneurial finance in key Muslim markets. Authentic because it encourages risk-sharing, channels savings to real economic activity, and enhances financial participation — core principles of Islamic finance.”
Unequal access to financing has been a problem in some Middle Eastern regions, as funding here is mostly based on relationships and family networks rather than the underlying idea of a project. This limits well-educated and talented young people from entering an entrepreneurial space and taking their ideas to the next level. The Milken Institute, a California-based entrepreneurial think tank, even pointed out that “a lack of economic opportunity [for the young] was a major, if not the main, catalyst for the start of the Arab Spring”.
Meanwhile, a number of crowdfunding platforms have been established in the Middle East, with Dubai taking on an important role. One example is Aflamnah. Claiming to be the first crowdfunding platform dedicated to the Arab world, it was launched in 2012 in Dubai and aims to help independent film-makers, artists, scientists, students and innovators raise funds for their projects.
Several successes
Another Dubai-based platform Eureeca, incorporated on the Cayman Islands and set up in May last year by Briton Christopher Thomas, a venture capital and private equity specialist, is now looking to cover the entire Middle East with its services.
“We launched Eureeca about nine months ago and it has been inspiring to see the market really embrace crowdinvesting and companies succeed on the platform,” Thomas tells GN Prime.
“Since our launch we have had 11 businesses listing on Eureeca. Investors have come from all across the world including the UAE, Jordan, Saudi Arabia, the UK, Belgium, Singapore and Japan, to name a few,” he adds.
Eureeca has had a variety of businesses across sectors and geographies, including a fashion designer of handbags called Poupee Couture that succeeded in raising funds from a crowd, or a social network for food called Foodlve.
“The UAE response has been great. The first business we funded was from the UAE — Nabbesh.com. The UAE is creating a lot of structures to help foster entrepreneurship in its truest sense — everything from co-working spaces to incubators and accelerators such as Turn8. There is quite a lot happening,” Thomas says.
Even in other Middle Eastern countries, crowdfunding is not unheard of any more. In Lebanon, Zoomaal has been launched to help the vivid entrepreneurial scene get funding for creative projects, and in Egypt, Shekra has been set up, the first investing platform designed to comply with Islamic standards.
Early adopters
Jason Best, Principal at Florida-based Crowdfund Capital Advisors, which advises Zoomal in running its business, is of the opinion that markets such as the UAE, Lebanon and Egypt are early movers in the crowdfunding industry in the Middle East.
“These are still early days for crowdfund investing. Large economies with high social media penetration such as Saudi Arabia, Turkey and Indonesia may have the most to gain from this opportunity,” he says.
However, there are also certain challenges to overcome in the Middle East. It remains to be seen how many crowdfunding models lead to successful businesses. The other is that the entrepreneurial spirit is still relatively underdeveloped in the region, and there is also the need to put a regulatory framework in place to provide a structure for businesses and to help avoid fraud or scams.
On the other hand, the cooperative nature of crowdfunding and its elements of risk-sharing could well be a new model for Sharia-compliant equity financing and could have implications for the Islamic finance ecosystem as a whole. n
