Crowdfunding gives start-ups an alternative access to finance, says Karl Grech, who has been appointed as crowdfunding platform manager and entrusted to develop the business for the first Maltese crowdfunding platform.
The Malta Business Bureau and the University of Malta have set up the Foundation for the Promotion of Entrepreneurial Initiatives to promote entrepreneurship in Malta and support local start-ups and entrepreneurs to raise finance for their projects and business ideas. Their first offering is a crowdfunding platform, which will be launched before the end of the year.
What is crowdfunding?
Crowdfunding is a fast growing alternative means to raise funding for projects or ventures by raising many small amounts of money from a large number of people. It is a true means of giving buzzing entrepreneurs and start-ups a chance.
Crowdfunding platforms are web-based and allow would-be investors and funders to make offers to start-up entrepreneurs. Often the start-up does not have the relevant resources to finance a project in full and struggles to obtain such financing from traditional credit institutions.
What market gaps does the crowdfunding platform seek to address?
In April 2013, the Malta Business Bureau published an assessment study entitled Market Gaps in Access to Finance in Malta. This report highlighted the financing options available for SMEs. Conclusions indicated how 72 per cent of SMEs in the start-up phase are currently using traditional lending products such as loans and overdrafts which are not necessarily the best solution for companies that are at this stage of development. Also, the report showed that 30 per cent of local enterprises find it difficult to raise the finance required to further their development.
A follow up entitled The Allocation of EU Funds in Aid of Private Enterprise report: 2014-2020 clearly demonstrated a gap in the market for enterprises that require financing in the region of €20,000 to €50,000. These were the main motivating reasons prompting the Malta Business Bureau and the University of Malta to take a proactive leap to launch a crowdfunding platform specifically to target start-ups at this lower bracket.
How will the crowdfunding platform work?
The platform will be launched as a donation and reward-based crowdfunding model by the end of 2015. Sponsors support projects voluntarily without expecting a financial return or equity. Instead, they would be willing to accept a reward that is promised to them by the project initiator.
Crowdfunding is typically used by organisations for research, financing and marketing
The business proposal or project will undergo a standard due diligence process – however the sponsor remains fully responsible for the funding. The platform will take an all-or-nothing approach and therefore there will be mechanisms in place for refunds should a project not meet its funding targets.
The rationale behind our decision to adopt an all-or-nothing model is that if the start-up or project initiator did the correct budgeting and identified the need for a particular funding goal of, let us say, €10,000 and they only reached €8,000, the likelihood is that they do not have sufficient funding to achieve the objective, and the project will fail due to lack of adequate funding. In this case the funds will be returned back to the funders.
What businesses are more suited for crowdfunding?
We will be open to take businesses from any sector, but as is the practice with crowdfunding, it is generally the creative and cultural sectors, software developers, tourism operators, social enterprises, NGOs and local government that tend to be the most active beneficiaries.
At what stage of market readiness should businesses be when launching their crowdfunding campaign?
Crowdfunding is typically used by organisations for research, financing and marketing. So it is up to the start-up or project initiator to decide what they want to achieve from crowdfunding and ensure that they can provide what they say they will do once funds are raised.
On the other hand, the sponsors can also assess whether the proposed project is viable. A start-up cannot expect to raise funds if its proposal does not factually show it is good enough to succeed.
What makes crowdfunding more suitable for start-ups than other forms of financing?
There are various advantages to crowdfunding. First of all, it allows start-ups to remain in control of everything including costs, timing, delivery, creative vision and execution, marketing and customer interactions. In the rewards and lending models, projects remain 100 per cent owned by the start-ups.
Start-up projects have the potential to exceed their own expectations with extra funds generated over and above the target. Start-ups can pre-test and pre-sell (pre-order) the product or service to ascertain the market’s interest. Start-ups can also get valuable advice from funders. Moreover, if start-ups don’t achieve their funding objective, they don’t lose anything.
Start-ups will get very few, if any, of these benefits from other financial services and institutions.
How does this platform complement other forms of support that the University’s Takeoff Business Incubator offers to start-ups?
This platform can be seen as another form of access to finance, in order to get start-ups off the ground.
What is the typical rate of success of projects seeking crowdfunding?
Average typical success rate in the global market is 45 per cent. However this varies. Our local presence will allow better reach and personal interaction to support start-ups in preparation and during the campaign.
What are the key elements to a successful crowdfunding campaign?
Of primary importance is a good idea that is supported by a solid business plan. Once that is defined, it is essential to create the need for the project by marketing through personal networks and creating hype as well as appealing to the feel-good factor of funders helping a start-up or project initiator.
An interesting statistic from entrepreneur.com is that once start-ups cross half of their funding goal, they have a 95 per cent chance of success.
For more information visit the temporary page www.crowdfundingmalta.com.mt or call on 7905 0478.