Crowdfunding’s dismal record in securing substantial investment for entrepreneurs has made it an unsustainable platform for businesses in the long run, according to a London Business School enterprise expert.
Dr John Mullins, associate professor of management practice in entrepreneurship, says the effectiveness of crowdfunding is hindered by several stumbling blocks.
Mullins argues that despite its selective success, the crowdfunding industry’s choice of businesses to invest in has been a failure.
“Much of the venture capital industry has a poor record at picking companies to invest in, not to mention often delivering negative returns to their investors,” he said.
Mullins even believes a backlash is likely once crowdfunded investments fail to offer returns.
He also criticised crowdfunding platforms for offering meagre returns for the amount of work done by the entrepreneurs.
“The emerging early data on crowdfunding suggests that the average amounts raised are in the neighbourhood of £1,000 or Dhs5,900,” he said.
“Doing a successful crowdfunding campaign involves lots of work like creating a compelling video, building a prototype, and even bringing your own network, as well.”
Mullins emphasised that start-ups should try and find some real customers and convince them to buy instead of wasting their time in crowdfunding platforms.
However, entrepreneurs who have benefited from the twenty-first century mode of investment dismiss such claims.
“It is ridiculous to say that crowdfunding is not worth the effort to get funding for one’s business,” said Loulou Khazen Baz, founder of Nabbesh.com.
“Business is all about hard work and perseverance and going to an angel investor will take the same amount of work. If you cannot do that then you should request funds from your family and friends.”
Baz, whose start-up secured $100,000 within 24 hours on Eureeca, a Dubai-based crowdfunding platform, said that the Middle East is still not aware of the potential of crowdfunding.
Chris Thomas, CEO and founder of Eureeca, said that the concept of crowdfunding is not new and it is definitely not a fad.
“The reality is the vast majority of businesses, good or bad have very little chance of raising money through traditional routes,” he said.
“Venture capitals (VC) simply don’t invest in most industries. Banks don’t lend. No matter how good your business is, if you don’t tick the boxes you are not going to get funded via the ‘old world’ avenues. And businesses need funding – they make up the bulk of an economy and with the lack of funding options available many of these businesses will fail.”
Thomas said that crowdfunding gives businesses a chance to syndicate a discussion with investors whom they might not be able to reach otherwise.
Despite crowdfunding’s convenience, Baz said that awareness about its potential is lacking.
“It is not going to take off like wildfire in this region as more needs to be done to educate people about crowdfunding as a potential funding platform.”
However, Eureeca’s head is convinced that crowdfunding could make financing for entrepreneurs a lot easier.
“It is the quickest way to raise capital. I know from personal experience that the lead in time between getting a VC to commit to funding you and actually receiving the money averages around 9 months,” said Thomas.
Baz seconds that opinion: “Crowdfund investors are going to be lot more lenient with start-ups because their involvement is low since they contribute lower amounts.”
So is crowdfunding more than a fad in the Middle East?
“Crowdinvesting is here to stay. There is a massive funding void affecting businesses globally, and the Middle East is no different,” said Thomas.
“Entrepreneurs need access to capital, and crowdfund platforms like Eureeca provide that bridge between investors looking for great investment opportunities, and the entrepreneur looking for funding.”