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Crowdfunding is a fairly simple concept: a large number of people pool together small bits of money to finance a larger goal. Its effect though has been revolutionary.
Over the past two decades, a growing number of platforms have emerged to allow more people than ever to quickly combine their financial resources. Today more people than ever are using this strategy in lieu of traditional bank loans, financing everything from personal pet projects to major real estate developments.
Why has it taken off? On the one hand, the hyperconnectivity of the Internet and social media age is enabling people and money to link up like never before. Also, important changes to regulations around crowdfunding have made it all the more possible (specifically the 2012 JOBS Act,
which changed rules around capital formation and allowed exemptions for crowdfunding). Beyond that, a lot of people are simply making good returns by investing on crowdfunding platforms. So it’s a win-win for countless people involved.
The result has been an explosion of crowdfunding platforms across different geographies and for different – and increasingly niche – purposes. Whether you’re in need of cash or have a small amount to invest yourself, below is a primer on the growing force that is crowdfunding.
Included are examples from the UAE and Saudi Arabia so you can be aware of sharia-compliant platforms in the region.
Probably the most well-known area of crowdfunding involves donations. This is how the concept first got started. Large numbers of people took to the Internet to raise money for good causes with no strings attached (think expensive medical procedures or emergency disaster relief). The results have often been spectacular:
In the UAE, platforms like YallaGive have taken a lead in donation-based crowdfunding. Successful campaigns include an effort by The Little Wings Foundation, which raised over AED 500,000 for life-changing surgeries for children with limb deformities.
The major donation-based platforms include:
International Platforms:
● GoFundMe
● Fundly
● JustGiving
● YouCaring
Gulf Based Platforms:
● YallaGive (UAE)
● Ehsan (Saudi Arabia)
● LaunchGood (Saudi Arabia)
Reward-based crowdfunding is where platforms begin wading into commerce. Here financial backers pledge money in return for something tangible – it can be small, like an acknowledgment of gratitude, or substantial, like a final product or service.
Over the years, campaigns to attract financial backers have become increasingly professionalized, with high-quality videos and marketing materials accompanying sophisticated pitches. Nowadays successful campaigns often transition into fully fledged e-commerce businesses.
When campaigns go viral they can turn small-time projects into serious businesses overnight. A famous example is Exploding Kittens, a card game, which sought to raise $10,000 on Kickstarter and ended up raising $8.7 million in 30 days with a whopping 219,000 backers.
For reward-based crowdfunding, the popular platforms include:
International Platforms:
● Kickstarter
● Indiegogo
● Patreon
● GoFundMe
● Ulule
Gulf-based reward-based platforms:
● DubaiNext (UAE)
This is where things get interesting. The success of reward-based crowdfunding platforms like Kickstarter and Indiegogo to propel relatively small projects forward served as a sort of proof of concept in the 2000s, demonstrating that substantial interest (and money) could be pooled rather quickly from the general public. This has since paved the way for equity-based crowdfunding.
With equity-based crowdfunding individuals can fund early-stage companies and small businesses in return for a share, allowing companies to circumvent banks and venture capital to raise money. The crowdfunding ecosystem got another major assist from US regulators in 2021, when the SEC substantially raised the offering limit for companies.
Secondary markets are now even being set up so equity investors can more easily exit investments made on platforms. Meanwhile emerging AI technology is making it easier than ever to evaluate the finances of startups, manage risk, and tailor investment opportunities to potential investors.
Many successful companies have leveraged equity crowdfunding to great effect. For example, Knightscope, a company that builds security robots, raised over $90 million from more than 28,000 investors on StartEngine. Monzo, a digital banking company, raised over £20 million from 36,000 people on Crowdcube in 2018.
For equity-based crowdfunding, major players include:
International Platforms:
● WeFunder
● Crowdcube
● StartEngine
● Seedrs
● Fundable
● Angelist
● SeedInvest
Gulf-based equity platforms:
● Eureeca (UAE)
● Reals (UAE)
● Scoopeer (Saudi)
Learn more about: Debt Financing Vs. Equity Financing , Which is Better For Your Business
Often called peer-to-peer (P2P) lending, debt-based crowdfunding enables individual investors to pool money and lend to both businesses and individuals in return for interest payments, essentially replacing traditional bank lending. The loan types run the gamut: platforms facilitate personal loans, small business loans, auto refinancing loans, etc.
The platforms let investors choose which loans to fund based on their appetite for risk versus return. An algorithm assesses the borrower’s creditworthiness and assigns them a risk grade.
The borrower gets an interest rate based on that. Like elsewhere in the crowdfunding sphere, artificial intelligence is supercharging platform capabilities, helping predict borrower behavior and more accurately assign credit scores. That’s exciting news, since it makes it less likely borrowers will default and improves transparency for investors.
Major players in debt crowdfunding, like LendingClub and Upstart, have even gone on to become publicly listed companies.
When it comes to debt-based crowdfunding, major players include:
International Platforms:
● Zopa
● Prosper
● Lending Club
● Funding Circle
● Upstart
Gulf-based debt crowdfunding:
● Funding Souq (UAE and Saudi)
● Beehive (UAE)
● Lendo (Saudi)
● Tameed (Saudi)
● Manafa (Saudi)
● Emkan (Saudi)
● Sulfah (Saudi)
● Mudarabah (Saudi)
● Dnaneer (Saudi)
Read more about: How debt-crowdfunding help investors & SMEs
Finally, there’s real estate crowdfunding. As the name implies, this allows individuals to pool money together to invest in real estate properties. That means you can buy into revenue streams from properties, even with investment minimums as low as $500 on some of the platforms.
The platforms often offer both debt and equity investments in various types of real estate, and with access to both individual properties and REITs (Real Estate Investment Trusts). Here too artificial intelligence is making a splash, helping improve property evaluations and market analysis so investors can make smart decisions.
Some of the leading real estate crowdfunding platforms include:
International Platforms:
● RealtyMogul
● Fundrise
● CrowdStreet
● PeerStreet
Gulf-based platforms:
● Stake (UAE)
● SmartCrowd (UAE)
● Slice Fintech (UAE)
● Prypco (UAE)
● Thara (Saudi)
● Aseel (Saudi)
● Ajdar (Saudi)
● Sahem (Saudi)
Read more about: Islamic REITs Vs. Conventional REITs
Disclamer:
This post is for educational purposes only, and the Firm does not directly or indirectly provide these services.
