“An investor’s always a fool,” said Jahangir Aka, a man who has mentored numerous small businesses over the course of his career, “until it comes good. Business plans never sound logical when you put them in; they just make sense to somebody who gets it. And to everybody else in the world, that looks like a fool.”
The Dubai-based investment executive’s words are especially apt in relation to ‘crowdinvestment’, through which startups can raise money by selling stakes to a pool of investors recruited online.
Crowdinvestment platforms differ from ‘crowdfunding’ sites like Kickstarter, in that they offer investors stakes in businesses rather than products or perks.
The concept has been welcomed by both investors and small and medium enterprises (SMEs), as it offers young businesses access to millions of potential investors simply by uploading a video pitch on a crowdinvesting platform.
That means an exponential increase in the possibility their pitch will catch the eye of a so-called ‘fool’ who gets their idea.
“Crowdinvesting has democratized the process of access to finance, enabling good ideas to surface that may not have been able to thrive otherwise,” said Jordan-based entrepreneur Mousa Ayoubi.
Ayoubi and his sister Hanae are the co-founders of harir.com, an online shopping club offering members discounts on design and lifestyle brands. The pair launched a 90-day campaign on Eureeca.com, an offshore crowd-investing platform with a head office in Dubai that launched in May this year. The Harir.com fundraising campaign launched in late October, targeting $50,000; by mid-November, the entrpreneurs had raised more than 150 percent of that target.
Harir.com is the kind of success story that Joanne Kubba, head of strategy, partnerships and outreach at Eureeca, hopes will help convince other small-business owners to adopt the crowdinvestment model.
Kubba pointed out the difficulties many SMEs have faced in obtaining investment via more traditional means.
“Let’s be honest… banks aren’t lending at the moment,” she said. “You could, if you’re at a later stage, target venture capitalists (VCs). However, it’s likely you’re too early [in your business cycle] for VCs. You could get an angel investor, but they tend to look [to invest] larger amounts. You could approach family and friends, but how do you structure that? How do you put a framework around it?”
Aka explained why VCs and angel investors will often not bother with SMEs who are looking for smaller injections of capital. “When you get into the economics of investing, whether it’s a $10 million ticket or a $50,000 ticket, the amount of work you need to do is often the same,” he said. “Arguably, the $50,000 guy needs more hand-holding… So you start looking for bigger [investments], because that’s where the payout starts coming in.”
Most of the small businesses are sitting outside the Gulf, in Lebanon, or Jordan, or Egypt.Joanne Kubba, head of strategy, partnerships and outreach at Eureeca
Traditionally, geography has also been a problem for SMEs: investors often only consider putting money into SMEs in the same country, or even city, as their base. That’s a particularly significant problem in the Middle East. “You have a region where the bulk of the investment dollars come from the Gulf,” Kubba said, “but most of the small businesses are sitting outside, in Lebanon, or Jordan, or Egypt.”
Crowdinvestment platforms offer potential solutions to these issues. They give SMEs such as Harir.com the chance to raise smaller amounts of capital than the VCs are usually willing to consider, and provide an opportunity to look beyond their immediate vicinity for people who believe in their ideas.
Through Eureeca, for example, Harir.com raised investment from London. Not long ago, the idea that a small Jordanian family business could get capital from the UK would have been almost unimaginable. But the world of finance is changing, and rapidly.
Joanne Kubba of Eureeca
You might think that more traditional investment institutions would view Eureeca and its clients with suspicion; more as upstarts than as start-ups. Not so, said Kubba. “Being a new space, we were nervous to see how the traditional funding ecosystem would respond. And it’s been fantastic,” she said.
Kubba explained that some VCs have approached Eureeca to suggest promising clients that the VCs believed were good candidates for online fundraising. “The crowd validates them,” Kubba added, “and then the VCs can look at them.”
Aka agreed that crowdinvestment can help businesses that may be too young to appear on a VC’s radar. “That concept’s very sound,” he said. “It can provide that first level of funding.”
‘Ultimate brand ambassadors’
Money may not be the greatest benefit that crowdinvesting offers to the businesses involved, either. For SMEs, word-of-mouth is vital to growth. And if you have a large crowd of shareholders, the chances are that each of them is going to be using their own networks to spread the news about your company and its products.
Eman Hylooz, founder of another Eureeca client, Abjjad (a social network for Arabic literature lovers), said she is already benefitting from her investors’ attachment to her brand.
“Everyone in our community shares our vision: To bring out the beauty of Arabic books. Whenever anyone invests, it’s like having new team members at Abjjad, marketing for us and participating in its success, without even being an employee,” she said.
What you end up with is investors who like your product, or they like you.Eman Hylooz, founder of Abjjad
Kubba agreed that a wider range of investors can also bring a bigger customer base.
“What you end up with is investors who like your product, or they like you,” she said. “And they become the ultimate brand ambassadors and the most loyal customers you’ll probably ever have. It’s changing the game.”
Crowdinvesting is not without its risks – and sites like Eureeca provide no guarantees a venture will be successful. “Investing in a small business in the growth phase is risky,” Kubba said. “There are no guarantees. Investors still need to do their own due diligence.”
For business owners, Kubba explained that crowdinvesting isn’t some magical solution to the thorny problem of fundraising. “It requires work. You cannot think that you’re going to come on our platform, put your pitch up and just sit back. That’s not how it works offline, and it’s not going to work online either. You have to engage. It’s only as good as you make it.”
One of the greatest skills that a new entrepreneur needs to learn is the elevator pitch.Jahangir Aka, Dubai-based investment executive
Aka said one of his main concerns with online platforms is that they may deprive entrepreneurs of valuable learning experience. “I think one of the greatest skills that a new entrepreneur needs to learn is the elevator pitch,” he said. “If you need that much support to raise money, it’s partly to do with the fact that you’ve not been able to articulate your business case well enough.”
He added that business owners should also beware of giving up equity in return for just money, rather than for the expertise and guidance that an experienced VC can provide. “It’s really wise to only let in somebody with their cash if they can bring you some strategic value-add as well. So don’t just make it about ‘I need 50 grand.’ It’s ‘I need 50 grand and I want you to help validate some of the decisions I make’.”
Kubba pointed out that Eureeca offers a forum where investors and entrepreneurs can discuss business. “You don’t have to lose that mentorship or that guidance,” she said.
Crowdinvesting opens up finance to a new – and much larger – audience of investors and entrepreneurs, but still requires the same diligence and passion to really make it work. The pool of ‘fools’ is wider, and time will tell whether their investments will come good.SHOW MORE