Crowdfunding is a popular means of financing businesses, from start-ups, to those looking to scale. However, it has not found much traction in the Caribbean. We discuss crowdfunding, plus some of the challenges for start-ups.
Although we might not think about it that way, the Caribbean region has a long history in crowd funding. It small societies such a ours, there has been a dependence and tradition of garnering the support of one’s circle, be it family, church and/or community, for help – such as to send a child to school, to cover health expenses, or to get a business off the ground.
In the entrepreneurial space, a common and known challenge here in the Caribbean, is the options and availability for financing. The primary route tends to be commercial banks. Angel investors, venture capitalists and other mechanisms that might be available in other counties are virtually non-existent in the region. However, Caribbean commercial banks are highly risk averse, and frequently require considerable amount of collateral and assurances from borrowers and/or the loan guarantors. As a result, the extent to which start-ups can secure the financial support they need can be severely restricted, which ultimately, may affect the long-term viability of the business.
Among tech entrepreneurs, and especially when digital products or services are being offered, the ability to secure financial support from banks may be even more challenging, because most of the assets of the business are digital (not tangible). Moreover, it is difficult to put a value on the business, or to identify assets against which liens can be placed.
Crowdfunding in the Caribbean
Suffice it to say, and in light of our history, it is surprising that crowdfunding is not more established here in the Caribbean. Admittedly, there have been crowdfunding platforms in the region in the past, some of which were initially backed by donor agencies, However, it seems that either they no longer exist, or might be dormant.
However, over the past few weeks, a crowdfunding platform, ArawakX, was in the process of being licensed in The Bahamas. The initial rollout of ArawakX will be limited to The Bahamas in the first instance, but there are plans to expand across the region. Further, companies may be able to access up to BHD 5 million (USD 5 million), and investor opportunities could start as low as BHD 25.00 (USD 25.00).
Although we might be familiar with some of the popular and more established crowdfunding platform, such as Kickstarter, Indiegogo, Patreon and GoFundMe, crowdfunding does not seem to be a financing option Caribbean entrepreneurs are eager to pursue. There could be a broad range of reasons for this, including the difficulty of accessing the raised funds from the Caribbean, and the perceived limited appeal of the business idea to potential investors. However, it is likely that with ArawakX’s appearance on the scene, more Caribbean-based crowdfunding platforms will soon emerge.
Crowdfunding models
In the first instance, it is important to highlight that several crowdfunding models exist, a few of which are briefly outlined below.
Reward-based crowdfunding. For businesses that offer a product or service, this type of crowdfunding allows donors to earn rewards based on the amount they donate. The rewards can be products or services offered by the business trying to raise funds, or prizes donated by others. Kickstarter and Indiegogo use this model, but with Kickstarter in order to receive the donations, the campaign target must be met. Hence if the goal is to raise USD 50,000.00, unless that goal is achieved, the fundraising business will not receive any money, and neither will the credit cards of the donors/funders be charged.
Donation-based crowdfunding. It is a popular model that frequently is used for personal needs and community causes, such as to cover medical expenses, for victims after a disaster, or to raise funds for local projects, such as an animal shelter. GoFundMe is one of the more widely known platforms, and campaigns tends to start in the fundraiser’s own networks. Individual donations may be small, but if amplified via social media or traditional media, there is the potential to raise considerable sums – depending on the situation.
Equity crowdfunding. This is the model upon which ArawakX is based, and is also known as crowd equity, crowd-investing, or investment crowdfunding. Essentially, and in exchange for funding, donors will take a percentage ownership in a business. Depending on the business, the amount being raised and the perceived risk, the percentage equity taken can vary. However, equity crowdfunding can be option is an start-ups, and particularly tech start-up, tend to explore, especially if that are looking to scale and need to raise large sums of money.
Key challenges of equity crowdfunding
First, a frequent observation made among Caribbean start-ups or small-to-medium enterprises (SMEs) is their reluctance to engage in equity financing. For many of them, they are eager to retain 100% ownership of their business, and are not prepared to entertain that option. Although it could be argued that a mindset shift is needed among businesses to appreciate the give-and-take necessary to secure funds, it must also be highlighted that generally, investors want to get as much equity in exchange for as little funds.
Investors tend to value businesses much lower than the owners (unless there is a compelling third party reference). Hence, some negotiation will usually occur, if the potential middle ground – between the investors’ and owners’ position – is palatable to the owner. However, if the chasm is too wide, the owners may walk away.
Second, raising equity financing is not easy. The pitch and product needs to be strong and on point, as the investors will be looking for flaws, and may actively seek to tear the pitch down. Depending on the process, the experience might not be for the faint of heart.
Third, investors tend to want aggressive returns on investment. Hence the business ought to be scalable or poised for considerable growth, at least five to ten times where the business was pre-investment. However, business owners may be more inclined to err on the side of caution, and be conservative in their growth projection. That approach can be a deterrent to investors, but the same time, if the business pitches to secure investors and cannot deliver, in the long run it may be severely hampered by the pressures brought to bear by those very investors.
In summary and as stated earlier, it is hoped that more Caribbean-based crowdfunding platforms will soon emerge, thus providing businesses with more investment options. The region’s start-up and entrepreneurship ecosystem is still underdeveloped. However, with more choice for financing, Caribbean businesses may be able to move past subsistence, to scale and hopefully, to thrive.
Image credit: Tumisu (Pixabay)
Important article. Often good ideas die out due to lack of funding or similar forms of support. Other than just the needed funds, there is a lot of value-added that investors ( or outside stakeholders ) bring to the business venture. I would say that we often narrow the range as well as the reach of sources of funding to the commonly known ones.
How about the bond market especially debentures and other marketable securities such as convertible notes to name but a few. These need not just be sourced from within the region, offshore markets are not entirely out of reach. And the business can be independently valued through professional stock valuers using transparent stock valuation methods so that there is no dispute in regard to the value on the table.