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October 2016 Business Financing

Published on: 2016-10-16 11:47:28     1660 times read    0  Comments
Young, Hip and Crowdfunded

--BY  NIKEETA GAUTAM

In a world full of various sources of financing, crowdfunding has become a popular way in which to raise funds to start a business. After the inception of the first crowdfunding network Artist Share in 2003, Kickstarter, Indiegogo, Microventures and Crowdfunding Asia have established themselves as successful models of alternative financing platforms across the world providing entrepreneurs with creative ideas with the money they need to change their ideas into reality. 

What is Crowdfunding?
Crowdfunding is basically an online version of fundraising where entrepreneurs with unique business ideas convince the masses for small monetary contributions. If the donors find them viable and lucrative enough, they pledge and give money to the entrepreneurs to start a business. 

Collecting funds from the general public has been part of the culture for many centuries. People have been contributing money for many social causes, medical support, educational purposes and political campaigns. In today’s world, though, the proliferation of the internet has made it convenient for startups and entrepreneurs to present their ideas in front of crowds to collect money. 

How it Works
Crowdfunding requires a platform. “Successful crowdfunding needs a really convincing story and lot of effort to create attraction. The online platform just makes the transaction of money easier,” says Suman Shakya, Co-Founder of Nepal Entrepreneurs’ Hub (NEHUB).

According to him, anybody who subscribes to the platform is required to pay a certain amount of money. “It is subscribed for a certain period until you get enough funds. As soon as you become part of this platform, you can keep your videos and narrate your story to the crowd,” Shakya informs. “The platform keeps a certain amount of money for itself and gives a large portion to the businesses.” 

Why is crowdfunding becoming so popular?
In crowdfunding, the fundraising round is public. Due to this, people are not too worried about contributing small amounts even if the project doesn’t go well. On the other hand, being a new concept in Nepal, using crowdfunding can boost popularity if the campaign becomes successful. In the world of social media, products can gain visibility faster and many people will share, like and comment on the campaigns. This will help people know what the brand focuses on. Finally, when the product becomes successful, entrepreneurs can collect immense feedback from consumers which will guide the next version of the product. “If the entrepreneurs have very impressive ideas about promising products, it is definitely going to be a huge boost for them,” opines Shakya. 

Mark Sears, CEO of Cloudfactory.com, a Nepal-based cloud sourcing company thinks crowdfunding as a viable marketing platform.  “Crowdfunding can be a great marketing force when done well. So, it is not just getting money but it is like getting a crowd to champion the products and services,” he says. 

How is it different from other platforms?
Any financial source is not easy for entrepreneurs to come by while starting a business. Startups may have excellent business ideas but most of them lack finance. Getting investments from venture capitals and angel investors may become challenging because the investors are likely to be more interested in profitability projections. 

“There is a big gap in business funding between venture capitals and banks. Many businesses need capital to grow but don't fit the profile that either of the above are looking for. So, crowdfunding is a great alternative in many cases,” says Sears. 

Those people who have properties and collaterals can choose bank loans or other financing options, but crowdfunding is for those who do not have easy access to finance. “So, it is a perfect platform where entrepreneurs are not likely to get stuck due to lack of finance,” says Shakya. 

Hong Sin Kwek, Founder of Crowdfunding Asia, a Singapore-based crowdfunding platform, does not see crowdfunding as a substitute to the other investment options. “Crowdfunding is not a replacement to any of these existing options. They are just an alternative for the startups and SMEs or even the mature companies to think of crowdfunding,” opines Kwek who was in Nepal in August for an event. 

ROI in Crowdfunding
There are mainly four types of crowdfunding trending across the world at present- donation-based, equity crowdfunding, reward-based, which are also called Crowdfunding Pre-orders and debt crowdfunding. 

In donation based crowdfunding, the people are just contributing money based on emotions, so, there is no return in this process.

“In equity crowdfunding, the equity is announced. However, investors need to research properly about the profit margin before investing. Yet, there are risks in this platform as investors might not get anything if the product or service doesn’t become successful,” informs Shakya. 

Meanwhile, contributors will receive products in return for the amount of money they have given in the reward-based platform or ‘Crowdfunding Pre-orders’ system. Similarly,in debt crowdfunding, the repayment of loans occurs with some interest. 

 Global Scenario
“Crowdfunding is democratising the practices of financing and is growing at a phenomenal rate across the globe. There are hundreds of equity, donation and reward crowdfunding platforms and they are growing rapidly every month,” views Sears. 

At present, there are around 20 renowned crowdfunding platforms among hundreds in the world. Popular ones such as Kickstarter, Indiegogo, Rocket Hub, Go Fund Me, Crowdrise, Pledge Music, Sellaband have hundreds of thousands of people including entrepreneurs and contributors associated with them. Oculus Rift, Pebble Watch, Reading Rainbow, Exploding Kittens and The Superbook, Zombicide are some of the notable projects of these platforms. 

As investors are pouring huge amounts of money into crowd funded projects, the levels of investment have skyrocketed.  A recent global report said USD 34 billion was raised worldwide in 2015 through crowdfunding platforms.  “Crowdfunding came as an alternative to traditional funding mechanisms just around 10 years ago,” says Ravi Phuyal, Managing Director of Islington College and also a Co-Founder of NEHUB. “Concrete and clear policies on crowdfunding have been introduced in a few countries including US and Europe. However, in other countries like Singapore, due to sufficient government funding on startups and businesses, people don’t depend on crowdfunding,” informs Phuyal. 

According to Phuyal, crowdfunding is gradually picking up momentum in India where some policies were introduced after 2013 (though lacking clarity)due to the massive rise of startups. “Only qualified investors can invest in such platforms there,” says Phuyal.

“There are multiple crowdfunding platforms in countries including India, China, Singapore, Hongkong, Taiwan, Indonesia and Philippines. Mostly, Asia has plenty of platforms which are based on donations. Large numbers of innovative projects are being crowdfunded in China and the rest of the region is catching up,” mentions Kwek. 

Failures and Scams 
While crowdfunded projects carry the potential of becoming huge successes, they can also turn out to become big failures. Some notable failures such as Kickstarter drone projects Zano, Ouya gaming console and Laser Razor along with Indiegogo projects Ubuntu Edge Phone and Kreyos Meteor smartwatch have shaken the crowdfunding community. Similarly crowdfunding platforms are also likely to be misused as scams and bogus purposes. Kickstarter was used for money for projects such as Crystal Wash 2.0 and the Annihilator Customizable car that turned out to be scam campaigns later.

Possibilities in Nepal 
According to Shakya, due to the lack of proper platforms, almost Rs one billion raised outside the country through crowdfunding for earthquake victims did not reach the right people. “If such a platform had been there in Nepal, the government could have made the fundraising accountable,” opines Shakya.

With or without crowdfunding, fundraising is a common activity everywhere for various purposes. “People have been collecting money in forms of donations for different benevolent purposes. And now it is necessary to bring in the crowdfunding platform for business purposes due to the colossal growth of economic activities worldwide,” says avocate Saroj K Giri. He also says the introduction of crowdfunding platforms is also important to monitor and regulate the fundraising activities. 

“Companies get loans by either share capital or bankloans which may not be smooth for most new entrepreneurs. If you raise the money from any other platform, Nepal Rastra Bank will question the source of the fund,” he opines. 

As a new concept in Nepal,Giri observes that many people even in the Ministry of Industry and the Office of the Company Registrar may not know about the platform. “For this, the media should play a major role to highlight the related issues,” he says. 

“We need to educate the people from the private sector and bureaucrats so that people start to take things in a positive light. As the whole world is turning towards such technology based platforms, Nepal cannot stay back by not introducing good policies,” opines Shakya. 

NEHUB recently held an event where the founder of Crowdfunding Asia was invited.  The event was mainly about exploring the potential and possibilities of crowdfunding in Nepal.“As we ourselves need to learn about crowdfunding, we are planning to collaborate with Crowdfunding Asia so that we can start its Nepal Chapter. It is basically the start of a conversation and a process. We are just taking baby steps and trying to spread the positive news about crowdfunding,” says Shakya. 

“Equity crowdfunding faces numerous challenges in the current legal climate. So, it will take significant support to bring the reform needed to make this an opportunity for entrepreneurs in Nepal,” says Sears.

“Nepal being very community driven, crowdfunding can be very effective here”

Hong Sin Kwek, Founder, Crowdfunding Asia  Founder and CEO, PhoenixICTHong Sin Kwek
Founder, Crowdfunding Asia 
Founder and CEO, PhoenixICT

Hong Sin Kwek is the Founder of Crowdfunding Asia and Phoenix ICT. Kwek has been in the field of ICT for the last 30 years. Starting her career from SIS Technology, Singapore she has not looked back since. Forthe last two decades, Kwek has been engaged in various cyber security projects while also volunteering in different organisations to develop ICT. Also a Senior Consultant at the Thai government’s National Science and Technology Development Agency (NSTDA), sheis actively engaged with Digital Manufacturing, Smart Thailand and Smart Cities. Kwek is also the Executive Director of ASEAN CIO Association where she helps both public and private sector senior level executives to accelerate their abilities to carry out the required responsibilities and build effective leadership. Kwek was recently in Nepal and Nikeeta Gautam of New Business Age talked to her about the crowdfunding scene in Southeast Asia and how it could also catch on here. Excerpts:

What brings you to Nepal?
I was invited here by Nepal Entrepreneurs’ Hub(NEHUB) for a programme to share my experience and aspects on crowdfunding. I never knew what was happening in Nepal until I stepped here to learn about the developments going on in internet and communications. The main purpose of my visit is to initiate a local chapter for crowdfunding Asia partnering with NEHUB.

What is crowdfunding?
Crowdfunding helps the entrepreneurs to connect to thousands of people to raise money to start their businesses. Here the investment and donations are usually carried out through the online platform. The history of crowdfunding has been in existence from the 18th century. As the Statue of Liberty was brought from France to US, the pedestal for the statue was built by collecting funds from residents. As the government didn’t have the money to build the pedestal, a crowdfunding campaign was initiated and the fund was raised within a short period.

There are four types of crowdfunding. The first one is donation-based and it is basically for collecting money for social causes, a movement for change, medical support, research or any kind of community project. People do not expect returns in this kind of crowdfunding.

 Another one is the Reward-based Crowdfunding in which people provide small amounts of money or buy their products. This platform is for startups and SMEs who have ideas of developing new products but don’t have enough resources. People who like those products buy or they contribute the money in exchange of the products. The world’s popular products like Pebble Watch and Facebook Oculus VR also raised funds and recognition through this crowdfunding platform. 

Equity Crowdfunding is another platform. In this model, the investors invest money in a company in exchange for equity. Finally, there is a platform called Debt Crowdfunding where the lenders pledge loans expecting to receive the principle amount along with the interest.

How is it different from traditional platforms like Venture Capital and Angel Investing?
Venture capitals do not invest in seed capitals for early startups. They usually look at the maturity of the business before they decide to come with the money.  During the early days of crowdfunding, it was taken as another competing way of collecting investments. However, subsequently entrepreneurs have realised that crowdfunding is actually helping them to validate the technologies they develop. 

Angel investment will continue to be there. Crowdfunding is not a replacement to any of these existing options. They are just an alternative for the startups and SMEs or even the mature companies to think about in crowdfunding. 

Are there any limitations in crowdfunding?
There is no limitation in social, donation and rewards based crowdfunding initiatives. Meanwhile, in equity retail investments, there are limitations set for different countries. In Thailand, for instance, retail investors can invest up to Thai Baht (TBH) 50,000 for a project. Similarly, TBH 500,000 is the annual limit for an individual for retail investment. The limitation has been kept to protect the investors from losing more money than what they have expected. Along with this, the investors themselves have to monitor their investments just like in any other traditional financial product. 

How is it beneficial to entrepreneurs? What areas of investment does crowdfunding mostly cover? Is it limited to certain sectors only?
Crowdfunding opens up a whole new world of possibilities for the entrepreneurs. If their ideas are real, they don’t have to wait for investments. All they need is to just put their ideas into the platform and seek for support. Definitely the entrepreneurs need to be prepared before asking for investments. It is also necessary to become responsive to the feedback of the investors. The entrepreneurs must engage with the donors to prove themselves as good startups. Nonetheless, they will be black marked in the crowdfunding community if they collect the fund and are not responsive. 

Every viable idea carries potential for crowdfunding. The only thing is it must not just be another commercial product. Rather it should be something benefitting to the society as a whole.

What are the counties Crowdfunding Asia is active in at present?
Crowdfunding Asia is in Thailand, Indonesia, and Singapore. In Singapore, we also have done two major events. We were also in China, but we didn’t get active as the market there is huge and there are already many other crowdfunding groups.

In addition to carrying out crowdfunding activities in these places, we also educate and advocate crowdfunding energetically whenever we get a chance. 

How do you find the crowdfunding scene in Asia at present? Which countries are registering most crowdfunding activities in Asia?
There are more and more crowdfunding platforms that are being established across Asia. There are multiple crowdfunding platforms in countries including India, China, Singapore, Hong Kong, Taiwan, Indonesia and Philippines. Mostly, Asia has plenty of platforms which are based on donations. Large numbers of innovative projects are being crowdfunded in China. The rest of the region is catching up. 

How different is your organisation from Kickstarter?
Kickstarter is also in many Asian markets. They are influentially present in Hong Kong and Singapore. As a crowdfunding pioneer, Kickstarter has done a fantastic job globally. We work very closely with them in various issues and concerns and are mainly focused on vertical industry. Kickstarter is big enough to attract people to get into their platform.

What inspired you to create Crowdfunding Asia?
It was a few years ago, I decided to start my own company Phoenix ICT but faced many hindrances in terms of bank loans and venture capital.  Having raised two kids as a single mother, I can feel the struggle of middle-class working women. So, in 2014, after one year of establishment of Phoenix ICT, we initiated Crowdfunding Asia. Initially, I did not plan for crowdfunding but the situation developed so that it got me into action to move in that direction.

How do you see crowdfunding in Nepal? What are the potential areas for crowdfunding here? 
Being a new concept for Nepal, crowdfunding has lots of constraints. The local crowdfunding scene may take some time to start as there are no laws and regulations. The government needs to understand the aspects and prospects of crowdfunding. As Nepal is very community driven, I think crowdfunding can be very  effective here.

Along with that, the mindset towards the startups among the people also needs to be positive for crowdfunding to grow. Nepal deserves to have all the alternative finance systems to help support the startups across multiple areas. 

I am seeing a lot of innovative ideas in many sectors being created by innovative Nepalis. These ideas can be executed efficiently if the regulations are well defined and well structured. 

What policies do you think are needed to kick start crowdfunding in Nepal? 
Rules and regulations are formulated for the welfare of everyone. But at the same time, with the changing times due to the digital economy and the whole transformation of the finance industry, if Nepal doesn’t change no one can help. If the constraints continue, you will be throwing away lots of opportunities. The restrictions won’t let the talented people work here and as a result they will go somewhere else. 

There are hubs like the Silicon Valley in countries such as Singapore and Thailand. Nepal needs to introduce entrepreneurial policies to provide opportunities to the startups supporting and empowering them. Policies related to tax reliefs and tax rebate should be used in order to grow the entrepreneurial vibe in Nepal.


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