This article appeared in the June, 2014 edition of Venture.
By offering cash-strapped entrepreneurs the chance to pitch their ideas directly to the general public, crowdsourcing is fast emerging as a major source of funding for Jordanian startups.
By Elisa Oddone
These are lean times for many entrepreneurs on the hunt for investment. Banks are still wary of lending, venture capitalists are increasingly hard to come by, and stricter capital rules and regulatory scrutiny abounds. But all this has allowed crowdfunding to quickly become a major new source of finance for creative projects around the world, including right here in Jordan.
Beginning as an online collection of financing through friends and family in the United States in 2008, communities have been pooling donations to fund members with creative ideas, only for this to increasingly take the form of equity investments or debt targeting entrepreneurs.
Around $5.1 billion in transactions occurred globally in 2013, according to a crowdfunding report by Massolution, a research and advisory firm specializing in the sector, marking a 100 percent increase on the previous year. According to a recent report from the Tabb research group, the value of the global crowdfunding market is set to increase by 200 percent to $17 billion 2015, with the number of crowdfunding organizations rising by 88 percent to more than 1,000.
Through platforms such as Kickstarter, crowdfunding has given a leg up to a huge variety of companies, including the virtual reality goggle maker, Oculus VR, which was bought by Facebook for $2 billion. The region is no exception.
MARCHING INTO MENA
As seven new crowdfunding platforms launched in the MENA region in 2012, and four in 2011, the Middle East is slowly becoming a new stronghold for the equity crowdfunding model, with Jordanian entrepreneurs taking the lead in leveraging the power of the Internet-based platforms and social media to market their ideas.
Joanne Kubba, head of Strategy Partnerships & Outreach at Eureeca, a Dubai-based crowdfunding platform that launched in 2013, told Venture the new capital raising model had filled a gap in the region.
“We filled a funding void by providing businesses with visibility, as there are hundreds of thousands of businesses out there in our region, from online to offline, that need funding to grow and scale, and by putting a structure in place for investors to look at their business,” Kubba said.
Allowing early-stage companies to attract financing from the crowd over the Internet, Eureeca is the first global crowd investing platform to enable businesses to raise money from its 5,000 or so subscribers worldwide.
“All other crowd investment platforms would only allow citizens in their countries to raise money for their country’s investors. We, on the other hand, allow businesses to raise money globally,” Kubba said. She added that companies on Eureeca have mostly received money from investors outside their home countries. “The reality is that businesses need a mechanism to enable them to raise money outside their own state’s boundaries,” she said.
So far, four Jordanian companies have signed up to Eureeca in the hope of raising money from the crowd, in exchange for equity.
After presenting a business plan, financial forecasts, proof of incorporation, and a video explaining their project, businesses can only rake in the money pledged if they reach their target goal within the three-month fundraising effort, with Eureeca taking in 7.25 percent of the money pledged. Otherwise the money returns to the investors and no percentage is taken in by Eureeca.
All of the Jordanian businesses reached their funding target. Jobedu, the clothing and design company best known for their pop culture t-shirts, actually exceeded their target of $100,000 in just four days of launching their plea for funds, offering equity at 5.35 percent. “We are currently in the overfunding phase, aiming to close at $300,000 in total,” Jobedu Chief Marketing Officer, Michael Makdah, told Venture.
“We were not expecting such a success. We thought it would have taken at least one month and a half to reach the goal,” Jobedu CEO, Tamer al Masri, said.
With most of the investors from the UAE, Saudi Arabia, and Kuwait, and only a few from Jordan, Jobedu registered in the British Virgin Islands (BVI) to enable investors worldwide to become shareholders.
“The Jordanian company has become a subsidiary to the BVI’s company, as the legal framework in Jordan only allows foreign investors to be partners in a local company if they hold 50 percent of the company’s ownership interest or have invested in the business more than JD50,000,” al Masri, explained. “The whole legal ecosystem should shift in the country to allow more opportunity for this fundraising model. We are missing out on an opportunity in Jordan.”
He noted that Jobedu, whose evaluation pre-fundraising was $2 million, will use the money raised for the expansion of its product line and to bolster distribution throughout the region.
STILL SOME SKEPTICISM
A lack of institutional investors has led some to believe that the crowdsourcing market lacks a much-needed element of professionalism that can help guide a young company towards profitability.
Some have also warned that companies using peer-to-peer funding platforms might not turn out to be winners, posing a threat to online investors who lack the expertise and financial smarts of venture capitalists.
Kubba downplayed both these fears, saying that investing—whether on or offline—comes with inherent risks attached. “Investing in growing businesses requires due diligence and checks on what you are comfortable investing in,” she said.
Furthermore, crowdfunding services can offer a vital financial lifeline to businesses that might not be the right size or operating in the right sector for a venture capitalist to show interest. “People seem to think that a sophisticated investor is only an ‘accredited investor’ with either $200,000 in annual salary or $1 million in net worth,” Kubba said.
This applied in the case of Abjjad, a Amman-based social network for readers, writers, and bloggers that also provides a directory for all books suppliers in the Arab region, with 38,000 registered members and more than 450,000 page views per month.
Abjjad CEO Eman Hylooz, told Venture that after knocking on the doors of hundreds of investors without success, she saw Eureeca as a last resort. It unexpectedly worked out, harnessing about $162,000 and exceeding an initial target of $120,000, from 44 investors.
“Social network business models have not really entered the investors’ mentality yet,” Hylooz said. “When we went to investors and told them we have not generated revenue so far, they just stopped listening. They do not want to go there, it is too risky.”
Around 20 percent of the amount raised came from users of the Abjjad website, as the investment threshold was set relatively low at $100. An average investor on a crowdfunding platform usually pledges around $5,000. “Only eight were ‘real investors’ keen on buying into startups, the rest were simply people who believed in our idea,” Hylooz said.
Documents and engagement for a business take place online and in public view in crowdfunding, helping to create a measure of transparency that can be absent when seeking funding behind closed doors.
Investment is prompted by a wider sense of community that the entrepreneur and business have with their clients, customers, friends, and acquaintances –all of whom might choose to invest due to a connection with the brand or the entrepreneur.
This sense of community helped Foodlve, the Amman-based social discovery platform for food lovers, raise $140,000 through Eureeca. “I decided to use crowdfunding to finance my business as I believe in the power of the crowd… each offer, even the smallest one, can contribute to growing the business,” Foodlve CEO, Nadia Shomali, said. She expects her website, which has around one million readers and buyers, to generate $150,000 in revenue this year by taking percentages on each purchase on the website.
NOT ALL ABOUT EQUITY
Crowdfunding sites, on which backers are rewarded with gifts like magazines, CDs, books, or early access to the products they support, rather than a share in a company, are gaining ground in the region.
Vida Rizq, CEO of Aflamnah, the first crowdfunding platform of this sort in the Middle East, said she decided to launch the platform in 2012 to encourage people with ideas to self-fund them and to show off some of the region’s talents.
The Dubai and London-based platform has so far hosted 70 projects, raising over $300,000 and taking 6 percent of the money raised on each project.
“The important thing is that the concept of crowdfunding is becoming more accepted and understood in the region. So the more award winning directors and great projects are crowdfunded on Aflamnah, the more the word spreads about Aflamnah and crowdfunding,” Rizq said. “We are working within an infrastructure and a network that still have a long way to go to mature, and I think that when it happens, there is no stopping crowdfunding as a serious means of promoting and funding ideas,” she added.
Much effort is put into educating investors on the possibilities of the new global investing model and how it works, as well as showing that it is a viable means of funding.
“Not only is crowd investment a new model globally, it is a completely new one regionally. Therefore everything is a challenge. Educating businesses on how they can use the power of the crowd to make an educated investment decision online is a tremendous challenge,” Kubba said. “Crowdfunding and crowd investment has hit the region, we see that this is coming faster. We work on a new form of funding that we think is going to become the mainstream form of funding, therefore this is only the start, there is much more that can happen.”