Why crowdfunding appeals to the Middle East

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McKinsey &Company | Jason Best, Principal, CCA | December 5, 2013

JasonBestA boom of crowdfunding platforms in the Middle East is helping to give entrepreneurs easier access to capital — to a degree that may help address economic inequality and political instability.

In December 2012, Loulou Khazen Baz launched Nabbesh (Arabic for “search”), the Middle East’s first online skills marketplace. Her goal was to provide young Arab professionals with direct access to flexible employment opportunities. When Baz needed expansion capital six months later, a new crowdfund investing platform called Eureeca, based in Dubai, gave her a three-month window to meet her all-or-nothing target of $100,000. It took her only 12 days and 23 investors to do so, with individual contributions ranging from hundreds to tens of thousands of dollars.

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Crowdfunding isn’t just the latest business fad to hit the Middle East. In a region where capital markets remain under-developed (with limited venture capital and public offerings), it’s a powerful financing tool that could empower a new class of entrepreneurs and investors. In the Middle East, unequal access to capital is not simply a problem for small and growing companies. It’s also an important driver of economic inequality and political instability in a region where many talented, well-educated young citizens have limited prospects for jobs that take full advantage of their talents. Access to funding is too often based on family networks and relationships, rather than the merits of the proposal. At the Milken Institute’s 2012 Global Conference, leaders from across the Middle East and beyond agreed that “a lack of economic opportunity was a major, if not the main, catalyst for the start of the Arab Spring.”

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“Crowdfunding isn’t just the latest business fad to hit the Middle East. In a region where capital markets remain under-developed, it’s a powerful financing tool that could empower a new class of entrepreneurs and investors.”

By enabling crowdfund investing, governments in the region can harness the power of the social Web to provide more equal access to capital, reduce friction in the process of investment, and improve communication between investors and entrepreneurs. Because crowdfund investing platforms promise efficiency, transparency, and market validation, they can also be an appealing vehicle for individual and institutional investors, as well as public sector investment funds that focus on small and medium-sized enterprises (SMEs).

Elements of crowdfunding

Crowdfunding is a simple but transformative concept. An entrepreneur proposes a business, charitable, or creative project on a crowdfunding Web site. If convinced, tens, hundreds, or even thousands of individuals commit relatively small amounts of capital to support the idea. Taken together, these contributions are often enough to propel the project from the idea stage to commercial reality. The crowdfunding industry is in its infancy, but it topped $3 billion in global transactions in 2012 and may exceed $5 billion by the end of 2013.

To date, the most common model for crowdfunding has been rewards-based platforms like the US-based Kickstarter or Indiegogo, where supporters of a film project might receive an autographed DVD in exchange for their $100 contributions. By contrast, businesses on lending platforms like the UK-based Funding Circle allow contributors to lend money at specified interest rates and terms.

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