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11/15/2013 McKinsey & Co - Why crowdfunding appeals to the Middle East
12/30/2013 KQED Radio - Richard Swart - A How-To Guide to Crowdfunding 12/20/2013 Gulf Times - Silatech Hosts Seminar...

Crowdfunding and Climate Innovation - The Next Step in Funding Impact Investing

The future of Impact Investing and Crowdfunding was on display in Nairobi, Kenya last week.  At the World Bank/infoDev’s annual funding meeting their budget was divvyed up among the creation of Climate Innovation Centers (CIC) in Kenya, Ethiopia, South Africa, Vietnam and the Caribbean and new funding mechanisms to allow the Bank to effectively seed innovative via crowdfunding.

CIC’s are incubators training impactful, locally sustainable technology companies.  Examples include a biofuel gas stove company that  can reduce carbon emissions and black smoke disease and a household filtration system company that recaptures and recycles water allowing women to perform their duties while saving them hours from painstakingly carting water jugs on their shoulders.   DSC0127

The new funding mechanism, called crowdfunding, will use the Internet, technology and the social network to connect would-be entrepreneurs with diaspora money.  It will allow investors anywhere to identify a wellspring of opportunity in emerging markets, fund their entrance into incubators, and seed them with capital. The CICs will provide training in management, operational and financial systems, procedures and controls.  They will also teach entrepreneurs how to broaden their fundraising efforts via crowdfunding to solicit future growth capital from investors who share similar communities and homestrings.  These investors won’t be traditional institutional investors but Africans, Asians and Carabineers who live abroad and wish to remit funds into these investment opportunities from their sofas in Detroit, Michigan or London.

Crowdfunding isn’t just a fad, it is turning out to be a powerful tool to democratize access to capital globally.  Research conducted by the University of California, Berkeley shows that funding by the crowd operates in a rational manner (eg: no hype), removes the stickiness of the process (eg: brings documents online, allows multiple parties to diligence and vet at the same time, and facilitates the immediate transfer of information and cash).  The industry which only started to gain traction in 2009 is already a multibillion dollar industry that consists of entrepreneurs, fundraising websites, ecosystem players that provide vale added services and of course at the center investors.

For the CICs and other considering this path the next steps are creating education, training and a funnel of opportunities.  This requires the connection of stakeholders in the private sector who focus on teaching entrepreneurship and merging those principals with crowdfunding and accounting.  The stakeholders include organizations focused on building entrepreneurial capacity, crowdfunding education companies and tools that facilitate the accounting of businesses and their structures and processes.  Sherwood Neiss of Crowdfund Capital Advisors says, “This fits perfectly with our firms capabilities.  Our principals are all successful entrepreneurs, who have raised millions of dollars in the private capital markets, hosted successful crowdfunding campaigns and wrote the framework for the crowdfunding law.”

Crowdfunding solves pressing problems for both NGOs and developing world entrepreneurs.  It answers the question, where do I find capital?  It makes the impossible possible. It provides a continuum of funding and community engagement from product to process.  And allows investors to enjoy the greatest opportunity for economic value, which is created at the inception and historically limited to the very few. 

But crowdfunding doesn’t come without risks.  And these risks (lack of oversight, regulation, & policy) can be greater in the developing world.  There are ways to mitigate this risk.  It begins with standardizing the process, coming up with a standard disclosures, connecting these ideas to co-working spaces, incubators and accelerators that are sponsored by trusted brokers like the World Bank and regulating all this online, via websites that are registered and tied into reporting systems where investors can see how their money is being spent.

In doing so the perennial question of trust and accountability are answered.  This is about creating a value chain of opportunities and allowing investors to put their money where their mouth is.  Businesses that are successful may not only have access to capital, but strong local resources to guide them and a distribution network of customer and investors for their product. 

Not only are these technologies sustainable but the process by which they are funded is efficient.  Consider electricity.  There has been a movement in the developing world to decentralize and promote off-the-grid technology that create mini grids.  Rather than using mega public funding to finance nationwide electrical infrastructure that take decades and billions, we may now use crowdfunding to create mini funding events and have an impact almost instantly and at a subfraction of the cost.  And by narrowing the funding target business models are promoted that are appropriate for a particular village or region rather than tackling national issues. 

As countries move from donation or perks based crowdfunding to debt and equity crowdfunding policy will need to be addressed.  The financing policy environment will be extremely important. Policy controls whether companies can succeed. Where they can do business and how much they can charge for things like electricity.  Policy needs to be enabled that allows these crowdfunding ecosystem to flourish.  This was the subject of the World Bank’s report Crowdfunding’s Potential for the Developing World.

With $60B in remittances already flowing into Africa a year but often times being immediately spent for goods or safety concerns over hording cash.  Crowdfunding may allow diaspora communities to engage directly with locally sustainable businesses that are having an impact and creating jobs and economic prosperity.  Crowdfunding will address the gender inequality issue as more female investors back more female entrepreneurs and promotes economic inclusivity particularly for parts of the work that historically have been called “the bottom of the pyramid.”  The time is here, the World Bank is taking the next steps.  What is your country doing?

SEC Votes Unanimously for Crowdfunding Rules

Screen Shot 2013-10-23 at 12.44.13 PMOctober 23, 2013 - Washington, DC.  Today, the SEC took the important next step in legalizing debt and equity based crowdfunding in the USA.  In an hour-long hearing all 5 commissioners, including two conservative ones, voted in favor of updating the securities laws to the way we live our lives today via the Web and social media.  “This is a huge step forward in our fight to increase access to capital for startups and small businesses,” says Jason Best, principal of Crowdfund Capital Advisors and co-creator of the Crowdfunding framework that was signed into law by President Obama.  “The work isn’t done.  We need to review the rules and provide substantive feedback on them so they can be finalized.  We look forward to continue working closely with the industry, the Securities and Exchange Commision and FINRA to finish the process.”  

Crowdfunding is an Internet phenomenon that uses the social network and crowdfunding websites to facilitate the funding of startups and small businesses.  It takes traditional “friends and family financing” and expands it to make it faster and more efficient to attempt to raise money for a business.   With the passage of the JOBS Act in 2012, the United States paved the way to use money raised via the internet and social networks as an investment rather than a donation or pre-order for a product.  The industry has grown dramatically in volume in just a short period.  A University of California Berkeley Study claims the market size will reach almost $4B when debt and equity crowdfunding begins.

Entrepreneurs will be able to seek up to $1M/year on regulated crowdfunding websites either known as funding portals or broker/dealers.  Investors are limited as to how much they can invest based on the following income or net worth thresholds. 

Income or Net Worth

Maximum You can Invest across all crowdfund opportunities/year

Example

< $100,000

5% of your income or net worth.  Whichever is greater

 

  1. If you make $50,000/year you can invest up to $2,000/ year.
  2. If you have a net worth of $75,000 you can invest up to $3,750/year.

 

 

> $100,000

10% of your income or net worth up to $100,000

 

    1. If you make $150,000/year you can invest up to $15,000/ year.
    2. If you have a net worth of $775,000 you can invest up to $77,500/year.

 

Investors need to understand that investing in startups and small businesses is a high-risk investment. While entrepreneurs must submit to a fraud and background checks the reality of business failure and fraud still exists. “We believe a risk greater than fraud is failure, despite the best efforts of the entrepreneur,” say Best.  

“Entrepreneurs should take the time to educate themselves,” says Sherwood Neiss, principal at Crowdfund Capital Advisors and also co-creator of the crowdfunding framework signed into law by President Obama.  “Raising money is not easy, nor should it be.  We want entrepreneurs to be successful but we also want them to understand the seriousness and responsibility of taking investor money and reporting to them.  This is why we created Success with Crowdfunding to help entrepreneurs and investors better understand this new type of investment and how best to use it.”  

Neiss and Best aren’t done.  They just released a report in conjunction with the World Bank entitled Crowdfunding’s Potential for the Developing World.  In the report they provide a roadmap for governments interested in implementing crowdfunding ecosystems to analyze whether they have the variables necessary for the environment to flourish.  They estimate that the global opportunity for crowdfunding will exceed $90B within 20 years.  They just returned from being part of a U.S. State Department Delegation to Kuala Lumpur, Malaysia where they presented at the Global Entrepreneurship Summit and from the first Academic Symposium on Crowdfunding, held at UC Berkeley where leading academics presented research papers on key findings related to crowdfunding.

 

Sharia Compliant Crowdfunding – Creating a Crowdfunding Ecosystem for the Muslim World

This week, the Global Entrepreneurship Summit took place in Dubai. The Summit, the first of which was launched by the President in 2010, is the premier gathering to promote prosperity through innovation and entrepreneurship and featured entrepreneurs, investors, policymakers, academics and ecosystem players from all over the world. 

Sherwood Neiss and Jason Best, Principals from Crowdfund Capital Advisors spoke about a new trend in startup and growth financing called Crowdfunding and how they are working to create a global framework.  In particular, they discussed how Crowdfunding compliments the principles of Islamic Finance and how Muslim nations can benefit from building a Sharia compliant crowdfunding ecosystem.  Such an ecosystem would build strong relationships among people, promote the socially responsible distribution of wealth, and encourage risk sharing in economic transactions to reduce the risk to any one party.  All core elements of both Islamic finance and crowdfunding.

In 2013 a new form of seed, startup and growth financing will begin in the USA.  It is called "crowdfund investing" where startups and small businesses can seek up to $1 million from their social network on SEC-registered online platforms. It is equity or debt financing.  Requires that 100% of the funding target is met and caps the amount investors can commit based on income or net worth thresholds.  It updates securities laws that prohibited the use of the Internet for raising capital as well as limiting investors to mainly only accredited ones.

“But it changes the financing landscape,” says Sherwood Neiss, Principal at Crowdfund Capital Advisors (CCA). “Unlike normal VC’s who provide money and expect the entrepreneur to do all the work, crowdfunding brings about a new class of stock and a new kind of investor, the “customer investor” who is not only a buyer of the product or service but a crowdsourced volunteer of knowledge and experience and a net promoter of the company since his or her financial return is tied to the performance of the company.”

Crowdfund Investing fills the zero to $250,000 funding gap that exists for startups and small businesses, particularly after the economic crisis of 2008.  Without this capital companies are struggling to survive.  This capital is critical because small businesses provide the bulk of the net new jobs according to the Kauffman Foundation. 

“Our framework details the way in which the transactions will take place,” says Jason Best, co-author of the Startup Exemption and Principal at CCA.  The Startup Exemption was the framework for which the tremendously bi-partisan law passed.  “An entire ecosystem is developing to support the infrastructure and allow for transparency, credibility and market efficiency.  Background checks on the issuers are mandated as well as investor education to make sure investors are informed of the risky nature of these investments.”

Expert Venture Capitalist Fred Wilson, said “if Americans take 1% of the $300 Trillion they have in savings it would create a $300 billion dollar market.”   Crowdfund Capital Advisors in conjunction with UC Berkeley and the Thunderbird School of International Management will be releasing a white paper estimating that in the first year over $3.6 billion will be transacted on crowdfund investing platforms helping fund over 38,000 companies.  

“Islamic countries have tremendous opportunity,” says Neiss.  “Islamic finance follows the rules of Sharia law.  Sharia law is based on the principals of shared risk and reward.  Where social justice is key and wealth is shared.”  Islamic nations produced over $1 Trillion dollars of value.  It is expected to grow to $5T in the next several years.  

If Crowdfund Investing can deliver the shared risk reward profile, it is hoped that it can also unify and stabilize communities and economies.  As communities come together to pool resource to launch a business and share in the risk and the potential.  “By working together we can promote peace and prosperity through entrepreneurship.  That’s something everyone can support,” says Best.

World Bank Selects CCA

world bank logo
The World Bank has selected Crowdfund Capital Advisors (CCA) as the winning bid for the engagement titled, "Crowdfunding: Unlocking early-stage financing for innovative developing country entrepreneurs."  The project will deliver research at the intersection of innovation, technology, and entrepreneurship to create opportunities for inclusive growth, job creation and poverty reduction in the developing world.  During the project CCA will provide the World Bank with analysis of crowdfunding's role in the developed world and developing world.

"CCA is thrilled to be working with the World Bank on this proactive, visionary research project to identify ways to leverage the new crowdfunding industry in developing nations and develop a long lasting relationships as we enter the Web 3.0, where social media and communities create access to capital.  Crowdfunding is a very old idea, that now benefits from technology that create efficiency and transparency.   This will fuel innovation to support innovation, entrepreneurship and small businesses globally," said Jason Best, Principal at CCA.  

The project will contribute to the World Bank's strategy for using Crowdfunding in conjunction with its efforts to deploy smart capital.

What are the Global Implications for Crowdfund Investing?

Government focused on growing economies focus on creating jobs. Small business and entrepreneurs are the driving force behind every successful economy across the globe. Cultures and governments that embrace and celebrate the entrepreneur are more likely to succeed in both the short and long term.

Although crowdfund investing is not an economic cure-all, it can be an important part of the solution. It allows significant numbers of citizens to make modest investments in high-growth and/or community businesses. And it can benefit your country for the following reasons:

1. Ideas Follow the Money

Fostering an ecosystem that encourages entrepreneurship and innovation requires capital. If the financial markets or regulations in a particular country are such that capital isn’t flowing, businesses can’t get the money they need. Entrepreneurs who are passionate enough about their ideas will go where the money is available to fund them. This is why many Canadian entrepreneurs head to the United States: because capital is more readily available to fund them there. Countries that wait to update their securities laws will create “brain drain” as skilled entrepreneurs head to other countries where they can fund and launch their businesses. An idea that is successfully funded in one country generally stays there and rarely returns back to the entrepreneur’s country of origin.

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