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Will Asia see the next crowdfunding gold rush?
Miriam-Doerr | iStock | Getty Images
As businesses seek out new ways to raise money, venture capitalists could start to fund some early stage businesses through crowdsourcing rather than relying on institutional investors, according to the latest research.
“The percentage of early stage seed deals funded by crowdfunding is growing, and is beginning to cannibalize the volume of these deals funded by venture capital firms in Europe,” said Robert Wardrop, executive director at Cambridge University’s Cambridge Centre for Alternative Finance in the UK.
Crowdfunding for lending represents about 80 percent of the total market in Europe, Wardrop said. But Asia is still ripe for development with demand for alternative financing for entrepreneurial innovation in sophisticated regions like Indonesia, Japan, Singapore, and Thailand growing in a move to remain competitive with China.
In Europe, there has been an emergence of smaller venture capitalists using crowdfunding platforms to both raise funds to make new investments and provide capital for later stages of existing investments, Wardrop said. And this trend could catch on in Asia.
The emergence of crowdfunding/crowdsourcing, funding a project or venture by raising monetary contributions from a large number of people via the internet, was created in the aftermath of the global financial crisis. When traditional financial institutions restricted its lending capacity and entrepreneurs turned to the internet to connect with investors to help finance their business plans.
While the crowdfunding scene in Europe is well recorded — the European Alternative Finance report estimated about 144 percent growth in the online alternative finance market from 2013 through to 2014 in Europe — there is no one reliable research database about alternative finance activity in Asia.
To help untap Asia’s crowdfunding potential, the University of Cambridge is planning to partner up with the University of China and corporate sponsors to conduct an Asian alternative finance report. The Asian alternative finance study is expected to be commissioned in July of 2015, and to be completed in the Q4 of 2015, Wardrop said.
The exact size of the alternative finance market in select countries in Asia may be a mystery now, but it is clear to one academic researcher that it is a big market that could become a massive one in coming years.
“The China market alone could represent USD 48 billion in crowdfunding by 2020, if the country liberalizes its law to allow more equity funding,” said Richard Swart, global crowdfunding and alternative finance researcher at the University of California, Berkeley, Haas School of Business.
Alt. Financing: Commitment vs Marriage
The world of alternative investing individuals and investors could be compared to the dating marketplace, with many entrepreneurs in search of a quick connection versus those that prefer to let the relationship slowly evolve in an effort to make a serious connection and lifelong commitment.
Crowdfunding has been deemed a quick capital fix for an innovative business person that is in search of a monetary transaction only. It results in market validation while getting traction in the form of early customers and adopters, one venture capitalist investor said.
“An important fact is that time to required to receive funds will usually be much shorter (for crowdfunding) than going through the venture capital process. The VC route is typically to build longer-term relationships with entrepreneurs, which often start even before they start to fundraise, ” said Albert Shyy, an associate at GREE Ventures in Singapore.
Another venture capitalist said his daily work load is less strenuous with the advent of the online alternative finance market.
“It’s made a venture capitalist’s life much easier,” said Anis Uzzaman, general partner and CEO at Fenox Venture Capital, Inc. a US-based venture capitalist investing in Singapore.
In Uzzaman’s experience, he said the advent of crowdfunding means the entrepreneur can be anywhere, so long as they have the digital connectivity with investors. It used to be that entrepreneurs had to attract and wait for angel investors to come to them to attract start-up funding. Uzzaman recalled a situation when he found a company through crowdfunding.com and he had dialed them up and learned the company was based in the countryside of Malaysia but it had most of its software users in the United States. It was an interesting investment situation, he said.
The relationship between crowdfunding and venture capitalist continues to evolve and it remains to clear that there continues to be a want and a need for traditional venture capital investments so long as there are institutional investors.
“Venture capitalists are more important in the age of crowdfunding. There is a 0.0006% chances of building a USD 1 billion company. It takes time and expertise to build the good one,” said Anurag Srivastava, CEO at Space Matrix Group in Singapore.
Regardless, there seems to be a respective place for both traditional and not-so traditional forms of funding for start-up companies, however.
Haider Aly-Reza, director at Bazingo Inc. a Singapore company focused on electronic commerce, social crowdsourcing and technologies aimed to empower entrepreneurs globally, believes there are a lot of bright minds in Asia and using crowdfunding will only be a logical step if entrepreneurs want to see the response of their product and help their product grow.
“Crowdfunding is here to stay and here to grow,” he said.
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