Crowdfunding for small businesses: what’s the story?
21 Jul 2017 by Robert Pašičko, Marina Petrović and Milica Begović, UNDP Alternative Finance Lab
Our experience taught us that crowdfunding is not just a new funding method. It’s also a tool to engage communities; a powerful outreach and advocacy mechanism; and a way to create new business models and use new technologies for tackling social problems.
Can it be applied for funding small and medium enterprises (SME)? Donating money can help buy a blanket for one person in need. But crowdfunding a small business can help it to produce affordable blankets for hundreds of people in need. This can contribute to building a whole ecosystem of supporters and ambassadors, serving as a powerful leapfrog.
This year, we’re trying to see whether crowdfunding can help small entrepreneurs access funding where mainstream banking is prohibitively expensive. We started with Ukraine.
Our recovery programmes there have one challenging task: to inspire people from war-affected areas, many of whom worked all their life in mines and factories, to become entrepreneurs. How can crowdfunding encourage entrepreneurs to build up their communities but also promote transparency in investing.
We selected 12 entrepreneurs and helped turn their vision into a crowdfunding campaign.
Here’s what we got:
- WalQlike, a tourism app that helps people explore cities, creating personalized routes and quests;
- Secret Expedition, a scientific game meant to draw more girls and boys into science and engineering;
- Voltyco, an affordable cargo electric bike that can travel 120 km on a single charge with a total load of 150 kg. The initiative is leading a campaign on Kickstarter;
- Naprintuy creates fashionable patches for clothes on human rights and tolerance (campaign coming out soon).
- Allow time - Teams (entrepreneurs) need at least 3 months to build their communities once they know what they want;
- Find early champions – to initiate a crowdfunding ecosystem in a country with limited or no crowdfunding experience, the quality of early campaigns is extremely important. For instance, they have to speak good English, be savvy with social media and have strong communication skills;
- This isn’t a sprint but a marathon – don’t place high expectations on first-time campaigns in a country where the culture of giving and supporting is absent. It is all about building the right ecosystem based on trust;
- Match the funds - The Danish Government has set a Fund that gained a lot of interest globally, matching successful platforms. That way, the selection process for companies is outsourced to the market; and governments get to leverage public finance.
- It’s a process – Voltyco, mentioned above, put a campaign on Indiegogo that brought in investors for a slightly different type of electric bike then they were offering. So they sat together with them, and are now preparing a new product for Kickstarter platform. Communication with customers is key. It helps understand their needs and how to find the common ground.
Some SMEs are at the start-up stage, building ideas or prototypes. Others are developing a new product or service or moving into new sectors. We are coming in at different times with diverse approaches.
- Upgraded by lessons in Ukraine, we are starting a new Global Crowdfunding Academy in Bosnia and Herzegovina, supporting 12-15 SMEs on creating their crowdfunding campaigns;
- In Moldova we are scaling up previous crowdfunding project which brought apple snacks to schools; by using crowd investing to merge domestic producers into single food export company; with the idea of bringing fruit to foreign markets;
- In Kazakhstan we are created Indiegogo campaign for the first inclusive and socially responsible café – you can still support it!
Equity crowdfunding or crowd-lending for SMEs are making a breakthrough. We are currently working with KIVA platform to put our next wave of campaigns out. We’ll cut out the middlemen and use a direct contract between KIVA and a social entrepreneur. Our partner Indiegogo recently created an equity crowdfunding page for investing in start-ups and growing companies. We expect it will venture out of the US sometime soon.