“Crowdfunding is an innovation in entrepreneurial finance that can fuel ‘the rise of the rest’ globally”
In 2013 the Worldbank helped publish a report on Crowdfunding’s potential to the developing world (InfoDev 2013).
Crowdfunding began as an online extension of traditional financing by friends and family: it created communities that pool money to fund members with business ideas. The crowdfunding platforms take advantage of crowd-based decision-making and innovation, and applies it to the funding of projects or businesses by donations, equity or debt.
The worldbank emphasizes that crowdfunding needs trusting relationships and a credible system that function within a ‘crowdfunding ecosystem’. This ecosystem has to fulfill some important requirements to allow for crowdfunding in developing nations. The most important of these are:
· A regulatory framework that facilitates internet assisted fund-delivery
· A strong social media market penetration
· A regulated online marketplace that protects investors and support capital transactions
· Opportunities to collaborate with entrepreneurial events (such as business plan development courses or startup incubators)
The recommendations to emergent nations that are working on these factors, are to adopt strategies that include partnerships with the government, NGOs and the private sector for best results. Explicitly, the World Bank urges for activities aimed at four dimensions of the ‘crowdfunding ecosystem’ to be developed. Next to regulation and technology, also the social context and cultural norms and beliefs need to be enhanced to creation of a culture of crowdfunding entrepreneurship. Not an easy transformation to bring about even on the longer term.
So it merits keeping in mind that crowdfunding is not for every nation.
For every country that wants to enable crowdfunding platforms to support local entrepreneurs, an evaluation of the strengths and weaknesses of their ‘ecosystem’ needs to be made. Central to this should be the economic rationalization whether crowdfunding and crowdfund investing offer a more efficient mechanism to deliver capital to local entrepreneurs in a way that leverages the existing infrastructure and community entrepreneurs to support those entrepreneurs.
So before we go crowdfunding-crazy in, for instance, starting up diasporic crowdfunding initiatives (more on this in the next blog), let’s be rational.
An emergent nation’s ability to leapfrog developed nations will depend in part of the speed and commitment with which its stakeholders embrace the new technologies and methodologies both for capital formation and enabling trust.