Funding the micro-entrepreneurs

“In Egypt, micro-entrepreneurs are facing intense competition from China and Asian borders, and there is no support system [for] the bottom of the economic pyramid,” says Tamer Taha, chief executive of Yomken.

Crowd-funding sites act as middlemen between investors and entrepreneurs. The biggest players — Kickstarter and Indiegogo — have become known for some of the quirkier products that people have pitched on their sites, including watches made out of old iPod Nanos that have raised millions of dollars over different stages of development.

More home-grown ventures are now cropping up in the Middle East and North Africa to cater specifically to Arabs. Yomken, Aflamnah and Flooosy have each recently launched in this region, while another potential player — Mawwell — appears ready to join the fray.

“This trend is real, it’s growing and it’s a movement we should all take notice of,” says Jonathan Axtell, program director at The Hub Bay Area, a group that helps entrepreneurs in the United States and is opening an office in Dubai.

Globally, there are now more than 450 crowd-funding platforms in operation. They are projected to raise a total of $6.2bn in funds mostly for entrepreneurs and small to medium enterprises (SMEs) next year, which is up from $1.6bn in 2009, according to data from the research firm Gartner.

Demand for crowd-funding platforms in MENA, in particular, is growing amid a dearth of financing available for SMEs. It is tougher in this region than other emerging markets to secure capital and only one in five SMEs has a loan or line of credit, according to the World Bank.

In fact, one survey conducted by the World Bank last year found that just eight percent of total lending in Middle East and North Africa trickles down to SMEs.

At the same time, small-fry investors who lost money during the global economic downturn have become pickier about where their money goes. Some crowd-funding sites allow them to select individual entrepreneurs based on descriptions detailing how donations or loans will be used.

“People began to realise that they have absolutely no ownership or power over their own funding, and it’s not going to their communities,” says Celia de Anca, director of the Saudi Spanish Center for Islamic Economics and Finance in Madrid, which organised a financial forum in October that discussed social impact investing and the rise of crowd funding.

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But experts warn that this burgeoning sector still faces many challenges. Some countries are mulling legislation on how to govern crowd-funding sites. The US legalised the concept in April through its US Jumpstart Our Business Startups Act — or JOBS Act — which enables small businesses to sell securities through crowd-funding websites, subject to certain procedures. It is still finalising rules on how, exactly, members of the public will be able to invest directly in a company and garner equity without the protections of a stock exchange.

Certain crowd-funding sites have also been criticised for saddling micro-entrepreneurs with high interest rates — of 40 percent or more — even for tiny loan amounts.

San Francisco-based Kiva — which has connected more than 800,000 entrepreneurs to $360m in loans from micro-finance institutions and individuals since it launched in 2005 — has come under fire in the past for partnering with microfinance institutions that charge high interest rates and other fees. The non-profit says it has been asking some of the more than 160 that are part of its network to decrease costs for entrepreneurs.

“We’ve really put a lot of pressure on partners,” says Michael Looft, Kiva’s regional director for Europe and Asia. “One recently left Kiva because we said, ‘we can’t justify having a partnership with you because we feel your return on assets [and] interest rates were too high.’”

Other crowd-funding sites charge a service fee or take a cut out of the money that entrepreneurs raise from investors. But the share can be steep. Flooosy requires each project set a minimum target to raise $10,000 then bumps that up by $3,000 to cover legal fees. If the entrepreneur or company successfully raises the $13,000, then the site also charges a five percent commission on the $10,000. In cases where a project fails to reach its goal, then all of the money gets refunded to the contributors, says Konstantin Akid, Flooosy’s founder.

Yomken takes a fifteen to twenty percent cut of any profits that are earned by manufacturers in Egypt once they have raised money and paid for their expenses, which Taha says are carefully tracked. Investors essentially turn into customers, as they pre-purchase goods with the money they gave and cannot earn any equity in an SME or take a share of its profits.

Aflamnah charges a $100 fee for each project uploaded to its site, plus a six percent fee for any monetary transfers to entrepreneurs, according to its website. The UAE-based company focuses on helping Arab filmmakers, artists and other creative types who are seeking funding, and fourteen projects have benefited from contributions since Aflamnah’s site launched this summer, including Annemarie Jacir’s movie When I Saw You. “Some have been extremely successful,” says Vida Rizq, one of Aflamnah’s co-founders.

“Annemarie Jacir’s film managed to double its target from $5,000 to over $10,000. The film had its world premiere at Toronto International Film Festival, and screened at Abu Dhabi Film Festival where it also won the prize for Best Film from the Arab world,” adds Riza.

The 49 supporters who helped crowd-fund the $10,100 needed to help complete When I Saw You will not be entitled to future box office receipts. Still, they have earned free bragging rights: the film is Palestine’s official entry for Best Foreign Film at the next Academy Awards.