Crowd funding: migrating to a larger fish bowl

Readers may well ask how effective is crowd funding? The answer is that this novel way of equity financing enables a company to raise fund through small contributions from a large group of individuals via an online platform.

So, is this relevant to us when traditionally Main Street banks ruled the roost and acted as a preferred lender to all types of funding? Can we ignore it as a passing fad or treat it as a temporary novelty which is making the headlines only to pass away unsung and unnoticed? Well, novelties are what make the financial wheel go round and ever since the onset of the industrial revolution, there were a number of novelties that characterized and contributed in no small way to the expansion of commerce.

Crowd funding is the application of a new concept. This consists of the orderly collection of funds through small contributions from many parties to finance a particular project or venture. For instance, equity crowdfunding will help businesses get access to capital and historically it attributes its popularity to a number of factors. Now the Commission is exploring the idea of how start-ups and SMEs can access finance at a time when mainstream banks tend not to be interested in embracing the risk profile of small companies – traditionally full of enthusiastic ideas but poor on collateral. One may question whether crowd funding can ever take root and flourish in Malta since it is a new concept and being untested it will undoubtedly meet with obstacles albeit it is blessed with less hurdles since so far it is unregulated. On the other hand, with some adaptation this can help fill the financing gap of companies at a time when cash flow is tight.

Banks in Malta are becoming more risk averse ever since ECB in Frankfurt assumed oversight and increasingly only lend against collateral but this is a dilemma since not all budding entrepreneurs are born into property or have rich uncles with fat cheque books. This begs the question – what are the opportunities and risks of crowd funding and will it protect contributors and lenders? During an expansion in GDP, it stands to reason that starting a company takes one on a very risky and challenging journey. Besides finding sufficient funding, there are always expenses that are impossible to forecast, challenges to make realistic market projections, assessing correctly customer preferences, and last but not least fight competition from peers. Consultants are expensive and it is not unusual to hear that unscrupulous ones, on the pretext of helping, would want a larger share of your venture.

Yet, embarking on a crowd funding campaign hedges these risks and serves as a valuable learning experience. Ordinary investors who agree to the plan tend to own it and will closely follow it on the slippery nursery slopes of early development. For instance, successful merchandising ventures financed through crowd funding are blessed with investor loyalty throughout the gestation period of the project when branding is slowly but surely taking place. It is common knowledge that loans to startups are not favoured by high street banks which consider them risky and high cost so they politely refuse applications or make impossible demands (like heavy collateral or high-risk premium). Usually, banks request due diligence, a three-year business plan (after a SWOT and PEST analysis) and schedule multiple interviews, then if the bank manager is interested he/she will re- quest more time to filter the figures through specialised software, and finally, only if successful, will applicants receive a draft sanction letter loaded with conditions/charges.

Now compare this lengthy ordeal with a simplified online process of crowd funding where under normal circumstances, one has to submit online application to an appropriate platform which then conducts vetting/due diligence work, and if accepted by platform, it creates an online profile, launch your online investment campaign, review all interested investors and choose the best fit. Should it prove to be successful it invites you to collect the funds. What are the costs for such a process? On all or nothing platforms (meaning that you only get the funds raised if you reach 100 per cent or more of your funding target) there is no fee to participate. If an entrepreneur sets a target and does not reach it, the funds are returned to each contributor, and no fee is charged by platform. On the other hand, if the fundraising project is successful the average commission for the platforms is a time fee based on total funds raised. This novel system speeds up the registration of potential business angels to join as accredited investors with the crowdfunding platform. Once approved as an investor, one can directly go in and search through the Internet platform for different companies, do fundamental analysis on the documentation and investor summaries thereby cutting out all the initial phone conversations and meetings. In fact, many investors can simply identify a company they are interested in and directly make an investment right then and there. What used to involve a series of meetings, phone calls, and lengthy consultation periods not to mention expensive legal advice, it can now be a seamless transaction with a faster response.

Crowd funding in Malta is becoming popular particularly in the wake of risk-averse banks closely monitored by strict rules so it stands to reason that it is a welcome alternative. To get started on the path to funding and exposure, an entrepreneur first needs to contact the chosen crowdfunding platform that best suits his/ her campaign theme and purpose, share the venture’s powerful message, then proceed to create a marketing video and list attractive/unique selling points of the business. In essence, crowdfunding is an innovative way for entrepreneurs to access the finance and exposure they need to grow. This is a relatively new phenomenon and a technique successfully employed by not-for-profit and creative individuals/organizations, but it is not a panacea for every business model and its detractors do not consider it as a sustainable source of revenue, because it involves a process based on collection of money and soliciting investments. Its critics say that investors expect steady returns and may not be patient if, as can be expected, a start-up company does not generate profits during its formative years.

To conclude, if you are a fish in a small bowl and wish to migrate to a larger one make sure that you have enough strength to survive the ordeal... once successful congratulate yourself for swimming in a sea full of opportunities.