As a business owner, one of the many things that an entrepreneur has to worry is access to funds. The flow of the investment into the business is necessary for survival and growth. In this increasingly competitive business environment, where approximately 50-70 % of the SME’s funding applications get rejected by the conventional banks in UAE, diverse investment mechanism is the need of the hour. SME contribute nearly 60% of UAEs GDP and is expected to grow to 70% by 2021. When an entrepreneur wants to establish a business in a city like Dubai, where there is a lot of competition, it can be daunting for him/her to raise the capital as framed by the government of the UAE. Therefore, this article will highlight one such mechanism which has emerged as an efficient way to raise funds in the booming fintech industry of the United Arab Emirates in the last few years.
What is crowdfunding?
Crowdfunding is a method of raising funds from investors, friends, and family through a collective effort primarily via social media and crowdfunding platforms. A crowdfunding platform leverages the network of these individual investors for greater reach and exposure. The approach is opposite to receiving funds from mainstream business finance. Traditionally to raise funds, an entrepreneur has to prepare a business plan and launch the product and reach out to funding sources such as angel investors, banks, and financial institutions. The entire procedure takes months to raise the required money. Crowdfunding platforms, on the other hand, have a funnel approach and much more easier to track the interested parties willing to invest in the business without wasting time.
Crowdfunding in the UAE
Since 2010, crowdfunding platforms such as Beehive, Eureeca, Zoomal, Yomken, and Durise have found prominence to support the local ecosystem in a variety of fields. The Dubai Financial Services Authority (DFSA) has introduced new regulations that will help SMEs to raise funds through crowdfunding. According to DFSA, crowdfunding regulations are catalytic to the growth of fintech industry in the UAE and are a first of its kind in the GCC. The regulations ensure clear governance for fintech businesses and provide appropriate protection for their customers.
The role of crowdfunding in UAE and Success stories:
In a recent study by PWC UAE mentions that a total of 97 campaigns were successfully funded in 2015-2016. 24 of which were female-led and 73 male-led. More men led crowdfunding applications were made. However, women outperformed their male counterparts in achieving their financial goals. The total crowdfunding finance generated in 2015-2016 is around $3.25 Million. Globally loan-based crowdfunding will cross $300 billion, and equity-based crowdfunding will pass $93 Billion by 2020. Countries such as US and UK have progressive systems to support the crowdfunding economy keeping in mind the SMEs and startups of the developed economies. In UAE 85% of the businesses are SMEs and employ 60-65% of the workforce. Hence the recent change in the regulations in UAE to make business finance more accessible for SMEs.
Different types of Crowdfunding
Like other forms of fundraising, there are three primary types of crowdfunding- Donation based, Reward-based and Equity Crowdfunding. The prominence of the Equity crowdfunding has grown over the years. However, this article will touch base with all the methods.
Donation Based Crowdfunding: This type of campaign has no financial return for the investor. A donation-based crowdfunding is commonly used for charities, nonprofits, arts, and medical emergencies.
Rewards based Crowdfunding: This type of campaign involves individuals contributing to your business in exchange for a reward which is typically a form of the product or service the startup offers. A reward based crowdfunding is a subset of the donation-based crowdfunding the only difference is the reward offered at the end of the campaign. Some popular crowdfunding platform using this type of campaign is Kickstarter, Indiegogo as it lets the business owner incentivize their contributor without incurring extra expense.
Equity Crowdfunding: This type of campaign is the most sought-after by the investor community who look to invest in innovation and new age businesses and receive bite-sized equity to become partners in the growth of the company. As equity owners post-trading capital in the company, the contributors receive a share of the profits in the form of a dividend or distribution.
We covered everything that you need to know about crowdfunding and the type of campaigns to raise funds. With the rise of the business startup scene in UAE and introduction of modern tools or mechanism of financing, the outlook of the fintech industry has changed. The data and statistics on fintech industry confirm this notion and bring conformity to further growth. As new businesses make their way every day in UAE, we at Commitbiz provide nuanced services which support this ecosystem. Our consultants and services are best in the industry and are based on research and focused on innovation. To know more about the services, contact us today.