Exploring equity crowdfunding opportunities for your Islamic business

$1.1 billion of funds was raised through equity crowdfunding in 2014, a four-fold increase from 2013. With Alchemiya’s successful fundraise through Crowdcube and with the emergence of several Shariah-compliant sites such as HalalSky and Club Ethis, what are the opportunities for Islamic startups to accelerate their growth through equity crowdfunding?

Equity crowdfunding is a fast-growing segment of the global crowdfunding industry.  It involves companies, typically startups, offering securities online and raising funds from a pool of investors who will then own a stake in the company.

Equity crowdfunding differs from rewards-based crowdfunding, where businesses raise funds through a pre-sale of their products without offering a share of their company. It also differs from debt-based crowdfunding, where a project can raise debt from a wide pool of investors through a single platform.

A 2015 Crowdfunding Industry Report by Massolution reveals that the total amount raised through equity-based crowdfunding grew by 182 percent between 2013 and 2014 to reach $1.1 billion in 2014. Goldman Sachs estimates the industry was worth $2.6 billion in 2015.  

The crowdfunding industry is in its early stages of development and is largely unregulated.

However, there were notable developments in the regulation of the industry in 2015:

1. The Securities and Exchange Commission (SEC) of the United States approved Title III of the Jumpstart Our Business Starts Up Act (JOBS Act), making it easier for U.S.-based companies to raise up to $1 million annually through equity crowdfunding.
2. The Securities Commission Malaysia (SC) approved several operators.
3. The UK’s Financial Conduct Authority (FCA) has started to issue approvals for similar platforms.

KEY PLAYERS

AngelList, Seedrs, CircleUp and Crowdcube are among key players in the equity crowdfunding landscape.

AngelList is a leading platform among technology startups; one of its notable successes is Uber, the transportation on-demand service company. Uber raised a $1.3 million seed round on AngelList in 2010 and has since become valued as a multi-billion dollar company. By late 2015, Uber was estimated to be worth $62.5 billion.

CircleUp is a leading platform among non-tech startups. Within a year of its launch, it supported 30 capital raises worth an estimated total of $30 million for a range of businesses, from energy drinks to ski boots.

In July 2015, UK-based Crowdcube announced what was dubbed as the ‘world’s first successful crowdfunding exit’ when E-Car Club, an electric car sharing platform that had raised 100,000 pounds on Crowdcube, was acquired by global car rental company Europcar. The purchase value was undisclosed, but E-Car Club’s Founder Andrew Wordsworth stated in a press release filed with the London Stock Exchange that their investors ‘are realizing a multiple return’.

POTENTIAL IN THE ISLAMIC ECONOMY

Equity-based crowdfunding relies on the principal of shared risk and is a natural fit for Islamic Economy companies. However, this does not necessarily mean that all fundraising campaigns on equity crowdfunding platforms are automatically Shariah-compliant. The Shariah compliance of a campaign depends on a number of factors, including the product that the company or startup sells and the structure of the legal agreements involved.

Alchemiya, an Islamic media startup, successfully raised  60,000 pounds ($75,000)  through UK-based Crowdcube, making it the first startup to launch a Shariah-compliant campaign on the platform.

Alchemiya's success was based on a clear articulation of the needs of its target audience, which the team categorized on CrowdFund Insider in 2015 as the “ABC1 socio-economic group of Muslims worldwide”, being educated, English speaking and living in major urban centers.

The team also had the campaign certified by prominent Shariah scholars Mufti Barkatullah and Sheikh Haytham Tamim, with the CEO Navid Akhtar commenting to CrowdFund insider that this made the project acceptable and attractive to investors who wished to remain within the guidelines of Islamic investing.

However, there is a need for dedicated platforms that can monitor and evaluate Shariah-compliance.

There is also a need for dedicated, “values-based” platforms that help socially responsible investors empower small businesses. This will have significant appeal to smaller Islamic businesses.

This is one of the key reasons why Blossom Finance, a crowdfunding platform originally set up in San Francisco, chose to target micro-entrepreneurs and launch its operations in Indonesia.

Explaining his firms's go-to-market strategy, Blossom’s Founder Matthew J. Martin says, "Initially, Blossom was focused on SME funding in the United States. We realized the demand was not strong enough to justify the go-to-market costs in the USA, so we refocused our attention on Indonesia which, having the world's largest Muslim population, has a huge demand for Shariah financial products."

Since the launch of its first fund in May 2015, Blossom has funded micro-entrepreneurs in a variety of categories. "So far the most popular category has been food vendors, [but] we've even had one barber shop who received financing," Martin says. 

WHEN TO CROWDFUND: KEY CONSIDERATIONS

To raise equity crowdfunding for your business, consider the following:

1. Equity crowdfunding is more suitable for consumer product-based companies that already have a built product or -- at the very least -- a prototype.
2. Firms offering B2B products or services might be better off exploring other financing options.
3. It is crucial for an entrepreneur to do their research on different platforms to find one that fits with the startup's target investor, financing stage and raise amount. For example, Eureeca focuses on seed and growth-stage SMEs raising five- to six-digit financing, which are markedly different from Blossom's beneficiaries.
4. There is a risk of damaging the company’s reputation in a public way. It is important for a business owner to communicate transparently any progress or hurdles faced by the business before, during, and after the crowdfunding process.
5. Get ready to be compared. A crowdfunded business also faces the risk of being seen in less favorable terms compared to a similar business funded by reputable venture capitals or angel investors. This may limit their chance of raising future financing. Especially in the Islamic Economy space, crowdfunding success stories like Misfit and E-Car Club is needed to build the credibility of equity crowdfunding.

© SalaamGateway.com 2016