In the journey from a revolutionary idea, to a start-up business, to an expanding business, it’s difficult for entrepreneurs and small and medium-sized enterprises to access the finance they need through the traditional channels of private capital markets. A new way to address this gap is crowdfunding—an innovative tool that enables entrepreneurs or enterprises in the early stages of the business development cycle to tap the financial resources of the online community.
Crowdfunding platforms provide a virtual space to connect entrepreneurs to potential funders in the “crowd” – the virtual community of people and resources that are connected through the Internet and digital technologies. Through these platforms, entrepreneurs can create campaigns to raise money for product development, operational expansion, or the launch of a new enterprise. Different platforms offer different crowdfunding models; contributions can be donations, or tied to specific rewards or products, or loans with interest rates and maturities, or represent an ownership stake in a private company (equity).
Crowdfunding democratizes financial opportunities and can lower the barriers to accessing finance for businesses that typically face more challenges in starting up and growing: businesses headed by youth and women, and “social” enterprises that seek both profit and solutions to social problems. In crowdfunding, resource allocation decisions are made by a critical mass of individuals and there are low barriers to entry; anyone can contribute or create a fundraising campaign with a bank account and Internet access.
While the market is just beginning to show signs of its potential in Latin America and the Caribbean, the global crowdfunding market has mushroomed to an estimated $35 billion for 2015 (Massolution 2015 report), from $1.5 billion in 2011. In an effort to establish a solid base for this funding model in Latin America and the Caribbean, the Multilateral Investment Fund (MIF) conducted pioneering studies about crowdfunding in Mexico (2014) and in Chile (2015), which provided in-depth analyses of the crowdfunding market in each country, and identified the elements essential to accelerating the crowdfunding “ecosystem” in the region.
The Mexico study was the first of its kind to provide research on a national crowdfunding ecosystem in an emerging market. According to the report, the major factors in this type of ecosystem are the local entrepreneurship culture, the size and potential of the market, technological advances and access to technology, a dynamic group of crowdfunding platforms, and the sophistication of potential investors. Advocacy organizations and the public sector also play a big role.
The Chile study assesses the potential for crowdfunding in Chile, and proposes a legal framework and clear regulations governing crowdfunding in that country. In addition, the report identifies next steps for developing Chile’s ecosystem: establishing securities-based crowdfunding, building regulatory capacity, and raising investor awareness through education and training.
Chile’s nascent crowdfunding market is already helping to finance the growth of small and medium-sized enterprises. One of the first to obtain financing through crowdfunding is Algramo, a social enterprise that establishes wholesale relationships with manufacturers of common consumer products—such as detergents, rice, and oil—so that it can buy the products in bulk and save significantly on packaging costs, without lowering the quality of the products. Bulk suppliers then distribute the products in large quantities to stores, which also reduces logistics costs. This business model allows Algramo to sell the products at a lower cost to retail consumers. Algramo completed a successful equity crowdfunding campaign on the Chilean crowdfunding platform Broota in September 2014, raising approximately $130,000 from 55 investors.
On Broota, investors contribute to a campaign in return for shares in the company. Investors register an account with Broota and are able to browse through hundreds of fundraising campaigns posted by entrepreneurs. Equity investors contribute for a variety of reasons—to support a local business, friend, or family member; to obtain a stake in a potentially profitable enterprise that will post returns; and to contribute to a model offering a social good or impact—and the reasons are not mutually exclusive.
We hope that Algramo will be joined by a significant number of other social enterprises and small and medium-sized enterprises that access funds through the crowd, tapping non-traditional investors who want to support new ventures in Latin America and the Caribbean. With the key stakeholders, structures, and conditions now identified through the work of the MIF and others, the next steps are to implement policies and educate both business owners and potential investors about this innovative funding mechanism, in order to grow the crowdfunding ecosystem and as a result, the small business sector in Latin America and the Caribbean.