EXCLUSIVE Banking & Finance Could crowdfunding seed the Gulf’s next Unicorn? By Andy Sambidge May 9, 2022 Crowdfunding is gaining momentum in the Gulf as more SMEs seek alternative funding options. Democratised funding is set to breed a new generation of innovative regional businesses, say experts Crowdfunding, the alternative funding concept, represents an exciting reality in the Gulf region following a flurry of regulatory reforms. This innovative practice of funding a venture by raising smaller amounts of money from a large number of people is a growth market proving an attractive substitute to more traditional financing. According to Statista, the market was worth $12.3 billion in 2021 and is forecast to double by 2027, growing at a compound annual rate of 11 percent. UAE digital economy In March, the UAE Cabinet approved the UAE System for Crowdfunding Platform Operators, giving the green light for crowdfunding activity to both the public and private sectors, with the Securities and Commodities Authority assuming responsibility for regulating platform operators. Sheikh Mohammed Bin Rashid Al-Maktoum, the UAE’s Prime Minister and Vice President, said: “It is one of the best means to support the financing of new innovative commercial ideas and support entrepreneurs by financing their ideas.” The move is part of plans to double the contribution of the digital economy to the UAE’s GDP from 9.7 percent to 19.4 percent within the next 10 years, and follows the launch in May 2021 of the crowdfunding platform Dubai Next by Dubai’s Crown Prince Sheikh Hamdan Bin Mohammed Bin Rashid Al-Maktoum. The digital platform, which allows entrepreneurs to create campaigns online and seek funds from contributors for turning their ideas into reality, is anticipating an increase in fund-seekers and contributors following the approval of the federal system. The not-for-profit platform operated by Dubai SME, the agency of Dubai Economy mandated to develop the small-and-medium-enterprise (SME) sector, is open to all nationalities and age groups in the UAE. “Crowdfunding has had a significant impact in ushering in a new generation of entrepreneurs in the UAE,” said Abdul Baset Al-Janahi, CEO of Dubai SME. “It provides an alternate financing option, and an ideal opportunity to turn startup ideas into viable projects.” As of mid-April, Dubai Next has 398 contributors and 62 campaigns approved and running, while the total number of campaigns registered to date is 1,570. Al-Janahi added: “With the federal legislation in place… crowdfunding platforms will see increased transparency, competitiveness and demand from the growing community of local, regional and global innovators in the UAE. It will create a sustainable pipeline of creative startups in the UAE.” One of the region’s highest profile crowdfunding successes saw Eureeca tie up with the UAE-based pay-per-minute car rental service Udrive on a deal that raised $1.3 million from 186 investors in just 48 hours in late 2020. The raise formed part of Udrive’s series A round of funding. Afterwards, Hasib Khan, Udrive CEO and founder, said the future of the company was “incredibly positive”. But these are still small numbers when compared to the likes of US-based Kickstarter, which has raised $6.5 billion through 219,658 successfully funded projects and nearly 21 million backers since it started operations in 2009. SME support Crowdfunding is set to take off across the region as the Gulf states seek to support their SME-driven economies. Even before the coronavirus pandemic hit, banks were being asked to help bridge an estimated $3.4 trillion SME funding gap in unmet trade finance globally. In March, Oman’s Capital Market Authority (CMA) approved the licensing of its first global crowdfunding platform, EthisX, managed by Ethis Investment Platform. This followed the sultanate issuing new rules regulating crowdfunding in November last year. Umar Munshi, co-founder and group managing director for Ethis Group, is in no doubt about the region’s potential. “While the GCC is in its early days for crowdfunding and fintech, it has the demographics and market characteristics to boom in the near term, and become a global powerhouse for crowdfunding,” he said. Mohamed Shehzad Bin Mohamed Islam, CEO of Ethis Investment Platform, echoed this sentiment: “In the past, the common investors had limited investment options, especially Sharia-compliant choices; placing spare cash into fixed deposits no longer cuts it. ETFs [exchange-traded funds] and robo-advisors have democratised access to public markets. EthisX aims to open a plethora of private investment opportunities via products such as supply chain financing, startup investments, and pooling of retail investors into previously inaccessible accredited funds.” Ripe with opportunity The CMA says it has attracted overwhelming interest from both international and local crowdfunding players after issuing its new rules on crowdfunding platforms. It added that the alternative funding method represents a major milestone in developing the capital markets and fintech space in Oman. Marcus Bernestrom, founder and executive director, FundedByMe MENA, which became one of the first crowdfunding platforms to be regulated in the UAE in 2018, said the Gulf region is “ripe with opportunities”, although Dubai currently has the strongest ecosystem. FundedByMe has decided to wind down its international offices after merging with Swedish fintech firm Pepins, but Bernestrom says demand for alternative funding, especially for SMEs, is “skyrocketing” regionally. He also expects the launch of Sharia-compliant platforms to become a trend in the Gulf region. “I’m surprised we haven’t already seen a lot more of this. Unless crypto takes over fast, I absolutely think that is a trend. Even if,” he said. In Bahrain, the country’s central bank last week issued new regulations applicable to crowdfunding platform operators following a comprehensive review of existing regulations, which were first issued in 2017. The new regulations include rules on platform offers and disclosures, avoiding conflicts of interest and conducting due diligence of borrowers/issuers. Shireen Al Sayed, director of regulatory policy unit at the Central Bank of Bahrain (CBB), said: “Due to the increased demand for introducing new financing products to serve SMEs and startups, the CBB has been keen to review the crowdfunding platform operator regulations to be in line with the economic recovery plan for the financial sector in terms of providing a conducive environment for crowdfunding platform operators. “The evolving business models such as crowdfunding will potentially provide new alternative sources of funding for new businesses and startups and serve as a catalyst for growth of such businesses.” Yasmeen Al-Sharaf, director of the CBB’s fintech and innovation unit, added: “Crowdfunding provides a viable alternative to tap into a new source of funding for startups and new companies… The CBB will continue to explore and develop new financial tools for emerging business models to keep pace with the needs of the local market, as well as to support and encourage efforts to create new services that match the evolving trends in the field of financial technology.” Meanwhile, in Saudi Arabia, Riyadh-based Manafa Capital and Scopeer were awarded the first two financial technology licences by the Saudi Capital Market Authority in 2018. Last month, the Saudi Central Bank (SAMA) issued a crowdfunding licence to Lendo after a successful trial through SAMA’s regulatory sandbox dedicated to innovative financial products and services within the kingdom. Big bucks: Global crowdfunding wins Oculus VR Palmer Luckey, the founder of Oculus Rift, started a crowdfunding campaign in 2012 and attracted more than 9,500 backers that raised over $2.4 million. In 2014, Facebook acquired Oculus VR for $2 billion. Allbirds The footwear firm’s crowdfunding campaign was launched in 2014 and raised $120,000 within five days through 970 backers. Today, Allbirds is said to be the preferred footwear of Silicon Valley residents. Peloton Interactive Peloton was officially founded in 2012, after securing $400,000 in seed funding from a group of angel investors. To create some buzz around the indoor exercise bike, the firm launched a Kickstarter campaign in the summer of 2013, raising $307,332 from 297 backers. Pebble Time Smartwatch developer Pebble Time raised more than £20 million on Kickstarter in 2021 from over 78,400 backers.