Dubai based Eureeca.com tackled this and other investor concerns by creating the world’s first equity crowdfunding website. Already operational businesses must apply to have their funding proposals listed on the site and set a funding goal. Eureeca will then send a third-party compliance firm to ensure the business is operational.
Potential investors can spend as little as $100 to buy a share of the business, depending on the terms and agreements.
The website has become popular with the start-up community and has already received 1,100 applications, only 3 percent of which were accepted. More than a dozen businesses in the Middle East have been successfully funded through the site.
We sat with Eureeca co-founder Sam Quawasm to talk to him about the value of crowd investing, and what it means for the startup community in the Gulf region.
Q. How did you come to start Eureeca? What you gave the idea of crowd investing?
A. We saw that the SME financing industry was dysfunctional for businesses and investors, both in the region and globally. There are so many great businesses out there that get stuck at various points in their development because of a lack of funding. For investors, access to equity investments in private SMEs has long been either completely closed off or quite limited.
There is also a huge socio-economic benefit to getting SMEs the funding they require to keep growing. Sixty to 70 percent of jobs are created globally by SMEs and 90 percent of hires occur after a business secures funding. And one of the primary reasons SMEs fail is a lack of access to funding. With this in mind, it was clear that something had to be done to make capital accessible to SMEs.
So, we thought that we could develop a globally scalable online marketplace that connects SMEs and investors. Out of this vision, and a whole lot of effort and persistence, Eureeca was born.
Q. What would you say is your most successfully funded project?
A. This isn’t something that is easily quantified as all businesses that have successfully raised money on Eureeca have raised the amount of capital that they required at their particular stage of development.
However, with that said, a number of businesses have displayed particularly impressive results during their campaigns. Jobedu, a Jordan-based, crowd-sourced apparel company, smashed its funding target in a mere four days, the fastest raise to date on the platform.
Another business, Harir, went into “overfunding” and raised more than double its funding target, raising 203 percent of its initial goal.Q. How has the crowdfunding landscape changed since you began Eureeca?
A. Here are two crucial developments. First, it’s grown and globalized significantly. There are now over 1,200 crowdfunding platforms globally. Eureeca is a good example of the globalization of equity crowdfunding; when we started in 2013 we were servicing the MENA region. We have since expanded our operations to Europe and Southeast Asia.
Second, now that the equity crowdfunding model has really begun to prove itself, later-stage businesses and larger, often professional investors are expressing interest in raising and investing through platforms like Eureeca. This is a really positive development that is helping to further validate the model.
Q. What feedback have you heard from investors about the site? Why are they more willing to risk their money for a return on Eureeca rather than traditional channels for product investments?
A. Investors can have a number of motivations for investing in a business, including financial returns, supporting a business or entrepreneur they believe in, or supporting a product or service they enjoy using. However, a recent survey of the Eureeca investor network found that 64 percent of Eureeca investors are investing through the platform to make money.
By investing through Eureeca, investors gain access to deals that they most likely would not have, deals that can potentially generate very healthy returns. And we already have evidence of this potential. For example, Search in MENA, a Dubai-based B2B marketplace, successfully raised $140,000 in 2014. A year later, it provided the first-ever exit for investors using the Eureeca platform. Through a share buyback scheme, investors sold their shares for 150 percent profits on their one-year investment -- that is, a $10,000 investment returned $25,000. It is returns like this that our investors are after.
While returns such as these are at the high end of the spectrum, studies suggest that a diversified portfolio of SME equity investments can yield sound returns. For example, a recent study on angel investing in the U.S. conducted by the Kauffman Foundation found that investors generated 27 percent internal rate for return, and a 2.7 multiple on their principal investment when they were invested in at least 25 to 50 businesses.
However, it must be emphasized that investments through the Eureeca platform, and equity crowdfunding platforms in general, should be a part of a diversified portfolio comprised of a number of asset classes.