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Crowdfunding to give key fillip to startups, SMEs

The proactive initiative rolled out on Monday by the government under the regulatory framework of the Securities and Commodities Authority will have a far-reaching positive impact on the UAE’s business landscape that is overwhelmingly dominated by SMEs

The entrepreneurial and startup ecosystem of the UAE is poised to get a significant fillip with the go-ahead given by the Cabinet to operate crowdfunding platforms to raise finance for innovative business ideas.

The proactive initiative rolled out on Monday by the government under the regulatory framework of the Securities and Commodities Authority will have a far-reaching positive impact on the UAE’s business landscape that is overwhelmingly dominated by SMEs. In line with the new initiative, operators from government and private sectors can crowdfund projects, provided they get the necessary permits from the authorities concerned.

Crowdfunding, a process in which numerous investors are invited to participate in a project or business, has a global market size estimated at $114 billion in 2021, and according to statistics, fewer than a quarter (22.9 per cent) of all worldwide crowdfunding operations ended up being successful so far.

Crowdfunding is essentially the opposite of the mainstream approach to business finance. Traditionally, if someone wants to raise capital to start a business or launch a new product or anything that requires capital to start, the entrepreneur needs to pack up a business plan, market research, and prototypes, and then market the idea to a limited pool or wealthy individuals or institutions.

With limited options to raise money, entrepreneurs could either take on debt from a loan or could raise money from friends, family members, and angel or venture capital investors. They could even take the “bootstrapping” route and scrounge up as much money as possible to fund the project themselves. In the late 2000s, a fourth option became viable for those trying to get something off the ground: crowdfunding.

“The amazing aspect of this new way of raising funds is that it mainly takes place online. The rapid technological advancements of the world have enabled investors to contribute small amounts to business ventures. Therefore, crowdfunding is very suitable for entrepreneurs with innovative business ideas that might not be receptive to large institutional investors or banks,” Arun Leslie John, chief market analyst, Century Financial, said.

John said such policy initiatives will help the UAE become more business-friendly. The country’s rising ranking in various business indices is a testimony to this fact. The UAE is ranked 16th globally in the World Bank’s ‘Ease of Doing Business’ report 2021. The UAE has ranked 15th globally in Kearney’s 2021 Foreign Direct Investment (FDI) Confidence Index, up from 19th place in 2020.

“A proactive business environment and vital policy initiatives will help UAE diversify from oil and become a leading trading nation.”

“In a world dominated by social media, crowdfunding has a very important role to play.

Creative businesses in blockchain and NFTs find crowdfunding easier to raise funds. Even companies following Islamic finance principles can raise funding in a Shariah-compliant way through this method,” said John.

Mohammed Shaheen, CEO, Seven Capitals, said crowdfunding has emerged as a new landscape for financing ideas and innovations.

“I believe that equity, debt, and rewards-based crowdfunding open new possibilities for funding more entrepreneurs in more places around the world. These changes enable entrepreneurs to utilise social media and the web to offer rewards, ownership of a shared vision, or even equity stakes to potential investors.”

Crowdfunding websites are creating transparency and more open communication by enabling investors to engage with these companies over time to monitor their progress and continue to support their success as the company grows.

“This technology makes it possible for an entrepreneur to more easily engage investors and customers anywhere; whether that be locally, the diaspora, or with others anywhere in the world,” said Shaheen.

John said another key Cabinet decision allowing the cooperative societies to list in the UAE financial markets would improve professionalism and corporate governance in these entities. In addition, the disclosure of information every quarter to the exchanges will force these firms to be more productive and thus make them more profitable.

“This improves the economic return for the government and the country. Obviously, the government will be able to monetize a part of the assets, and it can use this revenue for capital expenditure purposes. Also, in the future, if they need capital for expansion, they can readily approach the stock markets rather than the banks. Going public also improves the company’s profile, thereby increasing employee value and morale,” said John.

— issacjohn@khaleejtimes.com