Crowdfunding: What entrepreneurs need to know!
Are you an entrepreneur with a brilliant idea, but not enough money to turn your idea into a profitable finished product or service?
While banks may have teams dedicated to financing Small and Medium Enterprises (SMEs), that option may not be suitable for entrepreneurs just starting a business. To mitigate their own risk, banks will ask for guarantee or collaterals. These are difficult for entrepreneurs to furnish early in the business cycle.
So what can you do?┬á
You can try other practical alternatives to bank finance. One such great option is crowdfunding. Having emerged as a saviour for start-ups with promising ideas, crowdfunding attract small denomination capital from many people. All you have to do is, use technology to pitch your ideas to a large audience. The crowdfunding revolution was sparked by the very successful Kickstarter.com, which by November 2016 had funded over 115,745 successful projects and raised over USD 2.7 billion in pledged money.
Crowdfunding comes in three basic flavours ÔÇô donation or reward-based, debt-based, and equity-based. Reward-based crowdfunding, as popularised by Kickstarter.com, sees investors give money to promising ideas based on the premise that the project creator will reward them with finished goods and services. For debt-based crowdfunding, the creator or entrepreneur promises to pay back the money borrowed. Meanwhile, equity-based crowdfunding sees the entrepreneur give away a stake in the business to each contributor.
UAE based start-up Beehive enables debt-based peer-to-peer lending. The idea is that investors lend money to promising businesses, and get returns on the capital they have invested. Start-ups benefit from lower capital-raising costs, while investors enjoy higher than average rates of return.
On the other hand, UAE based start-up Eureeca uses technology to enable its investor network to buy shares in promising businesses. These investors range from friends, family and casual investors to angel investors, venture capital funds and institutional investors.
Crowdfunding isnÔÇÖt the only venue available to entrepreneurs. But it certainly is helping plug a large financing gap. The International Finance Corporation (IFC) estimates a USD 2.7 trillion gap in funding for Micro, Small and Medium Enterprises (MSMEs) in developing countries alone, with the MENA region alone needing an additional USD 320 billion in credit for MSMEs.
So if youÔÇÖre in the early stages of bringing your start-up to life, try crowdfunding. ItÔÇÖs a powerful addition to your capital-raising toolbox.