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Sarah Young / 26 August 2013
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 on the Ideation Center portal.
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.”
Platforms still needed to conduct proper due diligence to ensure they “protect(ed) their own ecosystem from the bad apples” — and their users.
“Until we see the first few successes and hear their positive stories spread virally, trust will be a hard sell and will simply need to be earned little by little. It is imperative that platforms, who are the prime curators of this new financing model, support project owners in following through and ensuring backers are protected from the possible negative outcomes.”
Still, despite these risks and cautions, it was important any new regulations did not stifle smaller new platforms and ‘overregulate’, he said.
“As the industry emerges quickly, support from regulators will be key. The fear is, though, that if regulatory oversight deem(s) this new form of democratisation of financing as dangerous to the system for one reason or another, they might take far too conservative and disparate measures across the region.”
He pointed to the example of the equity crowdfunding law approved by Banque du Liban (central bank) in Lebanon requiring an equity crowdfunding platform to put down close to $700,000 in reserves before it could start to operate.
And what about the donors?
Unlike the West, where tax breaks and incentives, along with an established sense of social and civic duty, have cultivated a culture of charity giving, no such financial incentives existed for investors here, Khalil said.
It remained to be seen what would draw the Arab digital consumer to donation models — whether that was the emotional appeal of humanitarian, social or environmental initiatives, or a sense of religious obligation.
These types of appeals were evident in Zoomaal’s recent successes, which included a short film, an education project and an album from Lebanese band Mashrou’ Leila, he said.
Models with donation in exchange for goods or equity, such as Eureeca.com, were not moving as fast, although online skills marketplace Nabbesh.com, which raised $100,000, was one success story.
While Khalil said he was not aware of any “super-supporters” in the region, he was sure they existed and would support quality local projects if they saw them.
“And let’s not forget how much potential ‘angel’ money there is in this region… the Gulf States have some of the highest densities of dollar millionaires in the world.
“So we can safely assume that if the industry gets built on sound principles and foundations, the money will come.”
In fact, one of the biggest donors to American platform Kickstarter is from Abu Dhabi — Sultan Saeed Al Darmaki, chairman of Al Darmaki Group, who has this month launched a film company focusing on horror, sci-fi and fantasy films.
The Wall Street Journal recently reported he had given to 90 Kickstarter campaigns, and often at the higher ends of the donating spectrum. His website also picks out hot Kickstarter projects to invest in, and provides tips for project owners.
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