It is exciting times for the nascent crowdfunding industry in Asia. While the crowdfunding movement is slowly gaining steam, there are still some people who are not clear what it constitutes and the possibilities that it holds. To share my views on the topic, this article will look at how start-ups as well as small and medium enterprises (SMEs) can potentially benefit from this new development.
The different types of crowdfunding
To start off, let us first define what crowdfunding is. Crowdfunding refers to the use of online platforms to raise small amounts of capital from a large pool of individual funders to support a specific project or business proposal. Specifically, there are 3 common types of crowdfunding:
1. Type I: Product-based crowdfunding. This type of crowdfunding involves returns in the form of merchandise or other non-monetary rewards to individual contributors. An example of such a site is Kickstarter.
2. Type II: Equity crowdfunding. This model involves the offering of company shares to funders. Equity crowdfunding is generally suitable for start- ups due to the high growth potential and the lack of (consistent) revenue. In terms of exit, backers typically aim for a company trade sale or to be bought out by a venture fund investing in the company. An example of such an equity crowdfunding platform is CrowdCube.com.
3. Type III: Lending-based crowdfunding. This model is also known as “peer-to-peer” (P2P) lending and it involves individual borrowers making loans to project owners with the promise of earned interest. Companies that go for P2P lending typically have regular income, with the ability for loan repayment. Under the lending-based crowdfunding model, there are also fixed loan durations as well as clear legal recourse should the deals go awry. An example of a P2P site is Lending Club.
Based on the 3 types of crowdfunding models, all of them can directly benefit start-ups as well as small and medium businesses (SMEs) in one way or another. To begin, let us look at the product based crowdfunding model…
Type I: Product-based model – a pre-sales channel for businesses
There are several benefits that product-based crowdfunding sites can bring to businesses. Firstly, it acts as a form of pre-sales channel that businesses can rely on to get clients/buyers. Secondly, funding collected from pre-sales can be used to finance the production of the merchandise. Thirdly, it provides a quick way to get market validation and how much funding they get could indicate how receptive the market is towards the product and/or service.
￼￼￼While this may seem like a novel concept, this is actually nothing new as there are precedents of Singapore startups executing successful crowdfunding campaigns on overseas platforms like Kickstarter and Indiegogo.
One of the more famous campaigns happened in 2013, when a startup used Kickstarter to raise more than US $1.4million within 30 days to mass-produce 3D printers. Even though the company was subsequently unable to cope with demands and had to issue refunds to some unhappy backers, this clearly shows the potential of product-based crowdfunding and how some businesses can benefit from such platforms.
Type II: Equity crowdfunding – alternative funding for startups
In the last few years, Singapore’s start-up scene has become quite vibrant and there are currently many government grants, incubator programmes and professional investors in the scene. As a result, some may be of the view that there is no need for Singapore to have equity crowdfunding as there is already strong support for start-ups. While in theory there should not be any issue for high-growth start-ups to get the funding they need, the reality is that funding in the start-up ecosystem is not so straightforward and is often fraught with challenges.
For example, professional investment funds typically have specific mandates in what they can put their money in. In other words, these investment funds do not finance companies that are not within their scope. In addition, these investment funds are themselves aggregated from high net worth investors; hence the main objective of these funds would be to make good returns. Therefore businesses that are assessed to be unable to reap astronomical returns within a fixed timeframe would unlikely get the funding they need – even if they could be the next early stage Facebook or Alibaba.
In comparison, equity crowdfunding does not have the same limitations that professional investment funds face. With equity crowdfunding, financial support from the crowd is not solely dependent on the venture reaping the highest returns within the shortest period of time; hence there would be an opportunity for potentially disruptive, yet not fully developed, businesses to get the equity funding they need to grow.
Type III: Lending-based crowdfunding – Targeting the under-served SME loans market
SMEs are the backbone of a country’s economy. According to data from SPRING Singapore, 99% of all businesses are SMEs. These businesses collectively employ about 70% of Singapore’s total workforce and contribute to about half of the national GDP. In comparison, when it comes to business loans, SMEs only accounted for 27% of total business credit extended in Singapore in 2012. Based on these statistics, it can be seen that despite their significant economic contributions, the share of SMEs loans is considerably lower than their MNC counterparts.
There are several possible reasons for the loan disparity. Firstly, the loan amounts that most SMEs are looking for is not sizable enough for banks to find worth their while. To illustrate, between lending a SME S $100,000 and an MNC $20 million, many banks would prefer to serve the MNC client as the fees from doing a S$20million loan would be significantly more. Secondly, some promising businesses may fall through the cracks and be unable to secure loans, as they may not have the appropriate track records. Hence, to address this financing gap, that is where lending-based crowdfunding can come in.
To give you a sense of how big this potential market is, based on Singapore’s Economic Survey for 2012, loans for general commerce was reported to be at S $57.3 billion. This meant that SME’s share of the existing business credit is estimated to be worth about S $15.4billion and, by extrapolation, the untapped SME loans market could be worth much more. CoAssets, part of Singapore’s crowdfunding ecosystem, recognizes this need and aspires to help businesses reach out and get the resources they need.
In conclusion, the development of crowdfunding can be viewed as a boon for businesses. However, there are still many issues to address, such as consumer safeguards, recourse in the event of a deal going bad, etc. before the full potential can be fulfilled.
That said, the Singapore government and relevant authorities are already getting in on the action. Just a few weeks ago, the Singapore Exchange announced that it would be exploring the feasibility of an equity crowdfunding platform for early- stage companies. The Monetary Authority of Singapore (MAS) also published some consumer guidance on crowdfunding. If all these are any indications, the business environment is set to grow in tandem with the increased vibrancy in the Singapore crowdfunding scene.
Mr Getty Goh has a Masters in Real Estate from the National University of Singapore (NUS) and is the CEO of CoAssets.com, South East Asia’s first crowdfunding website. Mr Goh is also a director with Ascendant Assets Pte Ltd, a real estate research consultancy and think tank. The views expressed are his own.