START-UP FINANCE

A LITTLE CAN GO A LONG WAY

Zulfath Saheed evaluates the latest movement in collective funding

Have you ever experienced a light-bulb moment, but simply not had the funds to launch your breakthrough idea?

Well, you may not be alone, as many would-be entrepreneurs have faced similar situations, when they were unable to rely on traditional sources of finance to act on their seemingly well-thought-out plans.

One answer to this conundrum, it would seem, could be to opt for crowdfunding. It has gained popularity across the world.

FUNDAMENTAL CONCEPT Crowdfunding typically refers to the use of small sums of capital from a large number of individuals, to finance a new business venture. It uses the easy accessibility of vast networks of people, via social media and crowdfunding websites, to bring investors and entrepreneurs together.

Indeed, crowdfunding has the potential to spread entrepreneurship, by expanding the pool of investors from whom funds can be raised beyond the traditional circle of owners, relatives and venture capitalists.

CROWDFUNDING MODELS There are two main options available, in terms of crowdfunding. Donation-based crowdfunding sources funds for a project by requesting a large number of contributors to donate a small amount to it. In return, the funders may receive token rewards that grow in prestige as the donations accumulate. For small sums, the backers may receive nothing at all.

Also referred to as ‘rewards crowdfunding,’ the tokens for donations may include pre-sales of an item that is to be produced with the funds raised. Donation-based crowdfunding can also be used to raise funds for charitable causes. As it is centred on donations, funders neither have any rights or ownership to the project, nor become creditors to it.

Meanwhile, investment crowdfunding is a means of sourcing funds for a business by asking a large number of backers to each invest in a small sum, for which they receive shares in the company. It may also involve both debt and equity stakes.

Micro-loan providers are a source of debt investment, whereby a large group of individuals may invest in a small part of a larger loan. Borrowers may look for this type of financing when traditional borrowing is too costly, or not an option.

GLOBAL PLATFORMS Possibly the best-known international crowdfunding platforms include Kickstarter and Indiegogo, both of which are based in the US and entered the market less than a decade ago.

Another interesting example of a crowdfunding campaign comes from New Zealand, where a large number of citizens pitched in to buy back the Awaroa beach – in the Abel Tasman National Park, on the South Island – from a businessman, thereby guaranteeing access to it by members of the public.

LOCAL SCENARIO In Sri Lanka, crowdfunding remains in a nascent stage, with only a handful of platforms – such as crowdisland, which has thus far followed the equity crowdfunding model; and Charity Apple, which is a non-profit initiative – being available to date.

At its launch in February, co-founder of crowdisland Jeevan Gnanam noted that “Sri Lanka is witnessing a strong start-up culture that is sowing the seeds of innovation-driven growth for the future.”

However, there remains a degree of scepticism about the concept of crowdfunding in Sri Lanka, with payment gateways, in particular, seemingly hesitant to support such ventures. This means that a greater effort is required to ensure transparency in related dealings, while a more favourable regulatory framework has been called for by those involved in the sector.

REGIONAL APPEAL Across the Palk Strait, the demand for crowdfunding has grown exponentially, with industry estimates putting the number of equity crowdfunded companies in India at nearly 200, over a period of 18 months.

The Securities and Exchange Board of India (SEBI), however, recently issued a statement, questioning the legality of equity crowdfunding platforms that cater to start-ups. It explains that “electronic platforms facilitating fundraising on digital platforms are neither authorised nor recognised under any law governing the securities market.”

FUTURE OF CROWDFUNDING A key feature of crowdfunding is that it enables budding entrepreneurs to take their ideas to the next level, safe in the knowledge that others out there are willing to go the extra mile and contribute to the future of what they deem to be a viable project. Thus, creativity is not stifled – especially among the youth – and innovations have a fair shot at reaping the benefits of market opportunities.

At the same time, a World Bank report cautions that crowdfunding is much more difficult than most entrepreneurs anticipate, and is not for everyone.

Platform choice is dictated by business needs and impacted by payment systems, while the quality and quantity of contributor networks are most important. Entrepreneurs should tap into complementary resources and organisations, to increase their likelihood of success, while crowdfunding can also have non-monetary benefits.