Crowdinvesting: Businesses tempt customers to be investors
- 4 June 2013
- From the section Business
Like most business owners, Ahmed Jaber relies on his customers.
They are the ones who flock to his warehouse sales, snapping up the cut-price designer label fashion he has sourced from across Europe and beyond,
But now Mr Jaber is hoping those same customers might put more of their money into the firm, this time as investors.
His business, The Outlet, is one of the first to appear on Eureeca. It's a crowdinvesting online platform that has just launched in the Middle East, focusing on businesses in the United Arab Emirates, Jordan and Lebanon.
It is similar to popular crowdfunding websites such as Kickstarter, typically used to raise funds for artistic projects from music and films to festivals and fashion.
But instead of making what is essentially a donation, and getting rewards or gifts in return, crowd investors put money into a business and get a small stake in the firm.
And, all being well, they might just get their money back and more besides.
Mr Jaber is offering 15% of The Outlet in exchange for $600,000, money he wants to spend on advertsing, hiring staff and trying to get into online retail - an industry still fairly undeveloped in the Middle East.
He has 90 days to raise the cash, but after two weeks, barely $10,000 has been committed. Slightly worrying given this is his best chance of sourcing the money.
If he fails to raise the full amount, the funds go back to the investors and The Outlet gets nothing.
"Banks won't lend to us because we're too young a firm to take on debt locally," Mr Jaber says, touching on an issue familiar to start-ups and new firms across the Middle East and beyond.
But even with options limited, he admits that agreeing to sell a stake in his business to perhaps hundreds or thousands of small investors was a "difficult decision" - not least because it involved making his business plan public and opening the books.
"When you work hard to build a business, it's like your baby," he says. "And you want to reap the rewards yourself.
"In the Middle East there is also a culture of keeping everything a secret in terms of running a private company - you don't want other people knowing how it's going.
"But we want to grow our business and this means we have to be transparent about it".
Founded in trust
Globally, the bulk of small businesses and start-ups fail. One estimate suggests about 95% of firms do not last five years and even if that figure is exaggerated, investments can clearly go wrong.
Investment contracts are with the individual business rather than the platform, and crowdinvesting is not regulated as an industry. But Eureeca's bosses argue that the transparency they demand, combined with thorough background checks, mean would-be investors should not be put off.
According to co-founder Chris Thomas, relying on "the crowd" adds greater investor protection than if the money had come from a more formal source such as a bank.
"The core ethos of crowdfunding is that you access your existing community," he says.
"That's your friends, your followers, people who subscribe to your mailing list, people that are the part of your trust circle. These are the guys that you want to keep on the right side."
But while that might be good for the companies, is there not a danger that investors are blindly investing because they like a product or an individual?
After all, putting your money into a firm can be done in minutes with a Facebook login, a couple of clicks of your computer mouse and a credit card.
"Many investments made online or offline are a combination of heart and your head - and we make decisions in part because we like the business, have an affinity with it," argues Mr Thomas.
"But what we do is let you make a cold-hearted business decision. I genuinely believe this is going to become the de facto way of raising money for SMEs - we're going to look back in 10 years and wonder how we did without it."
One size fits all?
Not everyone is quite so convinced. Dubai-based investment consultant Feroz Sanaulla thinks crowdinvesting has a role in supporting businesses but that it will only ever be a bit-part player alongside other forms of funding.
And he anticipates the model won't be without issues.
"Raising equity through crowdfunding is problematic because there could be different kinds of investors in any company," says Mr Sanaulla.
"When you have a small investor with $1,000, someone with $10,000 and someone with $100,000 invested, each has different expectations because they're taking different risks in the process. So how do you make sure there is a template that fits all three investors? That's the real difficulty."
But before you face that dilemma you have to raise the money - something Kris Barber is all too aware of.
His company, DGrade, recycles plastic bottles to make clothes, from school uniforms to branded hoodies for firms keen to show their environmental credentials.
It is quite a different world from designer labels, but Mr Barber is another entrepreneur trying to tap crowd investors. He wants to help centralise the business in the UAE where plastic bottle use is high and recycling levels low.
The initial move will cost about $300,000, for which Mr Barber is prepared to surrender 10% of the business
But he sees some of his backers as more than a source of investment.
"There's the serious investor who invests in other businesses too, someone looking for a return on investment. They'll put in larger sums and they're obviously important," says Mr Barber.
"Then there's the other type of investor who... has no experience of investing in other businesses but actually has an interest in the product and in the process - someone who will talk about the business and tell their friends."
And that, argues Eureeca's Mr Thomas, is perhaps the biggest benefit of crowdinvesting.
"It opens new avenues that weren't there before in terms of building your ambassadors," he says.
"Businesses spend many, many marketing dollars trying to get to that end client, to get to the customer buying our products, getting to the guy who is going to refer us to his friends.
"If you successfully crowdinvest you are going to have many dozens of investors, maybe hundreds of members of your community who believe in your product.
"The power of the crowd is so important, and when you can figure out how to unlock that, the world's your oyster."