This Saturday, April 5, marked the two-year anniversary of the signing of the Jumpstart Our Business Startup Act (JOBS Act), which paved the way for “equity crowdfunding” in the United States.
This year, the crowdfunding community celebrated that anniversary as Global Crowdfunding Day. While rules are still being drafted to make equity crowdfunding a reality in U.S., the broader crowdfunding world has already grown by leaps and bounds since that act was signed into law.
Simply put, crowdfunding allows anyone to invest in making an idea a reality — whether it’s a new product, a business, a book, movie, album, or video game, or a charitable project. By harnessing the power of the Internet and social media, crowdfunding platforms let people with innovative ideas harness donations as small as $1 from thousands or tens of thousands of people around the world who share their enthusiasm.
Someday, equity crowdfunding will allow these contributors to earn a return on their investment when they invest in a project like Oculus Rift, which was recently bought by Facebook for $2 billion. In the meantime, however, there is no shortage of creative ideas and potential in the crowdfunding community.
Facebook made headlines on Tuesday when it announced it would acquire Oculus Rift, a maker of virtual reality headsets, for $2 billion. Such acquisitions are not unusual in Silicon Valley — just last month, Facebook bought chat service WhatsApp for $19 billion. What’s unique about Oculus Rift is that it started as a project on the crowdfunding site Kickstarter.
Under the Kickstarter model, backers contribute to projects because they want to see them made. The most they can expect to receive is a copy of the finished product and a token of appreciation. The more than 2,000 backers who gave less than $275 to the Oculus project received only items like T-shirts and posters, along with the hope of one day being able to buy the VR headset in stores.
Some backers were outraged at the sale. If those who received a headset had instead received a share of the company, a $300 investment would result in a $20,000 payout (after accounting for subsequent venture capital funding.)
Last year Leen Sadder of Beruit, Lebanon had an idea to create an organic and biodegradable alternative to Western-style teeth cleansing. Called Miswak, this twig of the Salvadora persica tree has been used for teeth cleaning throughout the Middle East and Asia for millennia. Leen recognized the sustainability of eliminating both the toothbrush and paste and its application for the developing world. She created a crowdfunding campaign on Lebanon-based crowdfunding platform Zoomaal and within weeks raised over $18,000 from 301 backers — 104 percent of her target — along with 4,400 likes on Facebook and 573 tweets. This bought her money, market validation, and media attention. She is now in production. This idea that would never have seen “likes” or funding from banks or venture capitalists. Enter the alternative world of startup and small business financing, called crowdfunding.
Crowdfunding is a simple but transformative concept. An entrepreneur proposes a business, charitable, or creative project on a crowdfunding website. If convinced, tens, hundreds or even thousands of individuals commit relatively small amounts of capital to support the idea. Taken together, these contributions may be significant enough to turn the idea into a commercial reality. This industry is still in its infancy, but it topped $3 billion in transactions in 2012 and may top $5 billion by the end of this year.
Informal businesses in rural areas are a key part of the economy in many countries, like India. (Photo: Wikimedia Commons)
The informal sector — the unlicensed, unregistered small businesses that make up the bulk of economic life in many countries — is not all bad.
A recent article in the Economist analyzed the issue of informality in the Indian economy and drew out a range of excellent points regarding the size of the country’s informal economy and the energy and dynamism that undocumented economic activity has brought to rural India, as well as the difficulties that informality can bring. These include costs to the entrepreneurs themselves, in terms of accessing credit and problems achieving scale, among others, as well as costs to the overall economy in terms of lost tax revenue and the circulation of money outside of the financial system. Indeed, there has been no shortage of research on the challenges posed by informality around the world.
What this article gets wrong however, is its conclusion, regarding what India can do to promote the formalization of the informal sector. The author writes “The best way to speed up the process is to extend the reach of the financial system. In return for coming into the formal economy and paying taxes, firms would get access to capital.” This analysis misses an important point about informality.
Divisional Coalition meeting at Rajshahi including women entrepreneurs, officers the from the Department of Women’s Affairs, representatives from local NGOs, and bank officials. (Photo: BWCCI)
What happens when carefully crafted laws are not properly or fully enforced?
Back in 2009, CIPE partner the Bangladesh Women Chamber of Commerce and Industry (BWCCI) advocated for a number of local and national level policy reforms by endorsing the first ever Women’s National Business Agenda (WNBA).
The WNBA suggested policy changes concerning social and financial barriers faced by women entrepreneurs. This effort led the Central Bank to start issuing collateral-free loans for women entrepreneurs. The policy was initially a success and helped provide nearly $23 million in loans to 3,000 women.
However, due to the lack of continued monitoring, over time many banks began changing their lending fees or stopped complying with the law all together. This phenomenon is what CIPE calls an implementation gap – when laws on books are not practiced in real life. Since April 2013, with CIPE support, BWCCI has been trying to close this gap for women entrepreneurs in Bangladesh.
Providing the poor with access to credit at reasonable interest rates does seem to be a panacea for alleviating poverty. With credit, a person can produce a good or provide a service that will generate an income with which basic needs can be met. Credit also allows a person to utilize their talents, skills, and initiative to fill a niche in the market, spurring economic and entrepreneurial growth in a community and country. In rural Guatemala, for example, a woman bakes bread every morning in a stove bought with a small loan and sells the loaves to a shop in her village. In Nepal, a man buys five water buffalo with a small loan and sells the milk each morning to his neighbors.
Though it is difficult to estimate the affect of such micro-entrepreneurial activities on a country’s overall GDP, the impact on individuals and society is immeasurable. Small loans stimulate private entrepreneurship and expand economic freedoms crucial to building a market economy and democracy. They empower the poor with the freedom to make choices regarding how they use and save their income. If spent on food, health care, shelter and education, individuals can more easily escape the poverty trap. Raising the income level and standard of living among the world’s poor also builds a middle-income class that is more able to participate in civic activities and demand greater accountability from the government.
Image: CIPE Pakistan
In 2011, CIPE celebrates its fifth year of work in Pakistan. Since establishing its Pakistan office in January 2006, CIPE has built a strong reputation as an honest and knowledgeable broker, and a facilitator of important discussions between the business community and government. With an approach of paying close attention to local conditions and looking for openings for potential reforms, CIPE has supported the business community in a range of efforts that have led to significant achievements.
These include reforming the law governing chambers of commerce and business associations, improving access to microfinance through the State Bank of Pakistan, raising standards of corporate governance, improving the quality of economic journalism, and providing a level playing field for women entering business by helping to launch and build the capacity of women’s chambers. In carrying out these programs, CIPE has worked with a wide range of chambers and associations, think tanks, academic institutions, NGOs and government institutions across the country.
Each year, CIPE compiles a Pakistan Activities Report, highlighting the achievements, successes and exceptional nature of the work carried out by these partners. You can learn more about our work in CIPE Pakistan’s newest report, covering our activities for 2010. Read the report here.