The World Bank does not miss the potential that crowdfunding can have in developing countries
infoDev is a global partnership program of the World Bank Group. Its mission is to enable innovative entrepreneurship for sustainable, inclusive growth. They basically work in five areas: Access to Finance, Agribusiness Entrepreneurship, Climate Technology, Mobile Innovation and Women Entrepreneurs. They recently published a report studying the promise and the risks of crowdfunding as a tool to finance innovation and growth in developing countries.
“This exciting phenomenon [crowdfunding] is spreading across the developed world and is now attracting considerable interest in the developing world as well.”
They examine all kinds of crowdfunding methods (reward-based, donations, debt and equity) as a new way for entrepreneurs, individuals and companies to raise billions of dollars for their projects. What started as an online extension of traditional financing by friends and family, became a global phenomenon taking advantage of crowd-based decision-making and innovation.
According to them, the greatest potential lies in China, followed by the rest of East Asia, Central Europe, Latin America/the Caribbean, and the MENA region (Middle East and North Africa).
Everything Revolves Around Trust
Their approach is having a deep look into some of the key factors that explain why crowdfunding has been doing so well in developed countries since the financial crisis started back in 2008.
- Internet usage: without the Internet, crowdfunding wouldn’t be a question of many people. The project which needs the funds would finally find them between the close friends & family circle of the project. Social media turn out to be the main channel to spread the word about the projects, reaching people who wouldn’t have known about the project in other way (“willing investors”)
- Regulated online marketplaces: it’s not new that many backers of the projects have no previous relation to the company or the project. Crowdfunding platforms can provide users who already know how this method works.
- Hubs: collaborative environments, co-working spaces and channels to foster entrepreneurial opportunities.
Summing up, it’s all about creating and maintaining a supportive ecosystem that enables trust, getting ready for this new investment vehicle that puts together entrepreneurs and willing investors.
Taking the Developed World Experience to the Developing World
Since we have statistics, analytics and many experiences on crowdfunding, it could become a tool for developing countries, at least as useful as it is in the developed ones. But we won’t reach that point without the support from governments and development organizations. Also, it may happen that developing countries implement more efficient and effective entrepreneurial funding systems, more advanced than the legacy systems prevalent in the developed world.
Crowdfunding involves risk, particularly regarding the reported fraud, business failure and execution or fulfillment challenges. How to mitigate them? infoDev explains it must be done through:
- Regulation: “a country-specific framework for crowdfunding investing should be created to encourage investment in startups and small businesses and attract diaspora remittances”.
- Technology: again, build trust around a platform and its community! The best way may be enabling tools to systematize and streamline the business lifecycle.
- Social and cultural approaches: active and engaged individuals in online social networks
A Rol to Play in Fostering Crowdfunding
“Governments around the world as well as development organizations, VC funds and NGOs are watching crowdfunding closely to see whether it has the potential to solve the “last mile funding problem” faced by many startup companies.”
What developing countries are wondering is whether crowdfunding and crowdfund investing offer a more efficient mechanism for local entrepreneurs to attract capital in a way that leverages the existing infrastructure and community resources to support them. The rate of growth of crowdfunding, and its emergence in both developing and developed countries, suggests that this phenomenon can become a tool in the innovation ecosystem of most countries.
For more information, you can download the report here.
Photo credit: The World Bank