134 GlobeAsia October 2012

Technology

Can crowdfunding change the face of innovation in Asia?

he basic concept of crowdfunding will be familiar to most people by now. Crowdfunding is an approach to funding

wherein multiple investors make small contributions to an entrepreneur or organizer, in order to turn an idea into reality. In the past few months crowdfunding has emerged as the new buzzword in start-up circles, but does it truly have what it needs to catch on in Asia, or is it all hype?

While it’s true that Asia cannot be considered a single economic entity, and its economies range from developed countries like Japan and Hong Kong to emerging examples like India and China, one thing seems to be constant across the board – the startup ecosystem, particularly with regard to venture capitalists (VCs) and angel investors, is not as mature here as it is in the West.

Tech start-ups in Asia need crowdfundingInvestors in tech start-ups in Asia tend to be extremely risk averse, and so the access to capital for entrepreneurs is throttled by people who don’t have the same passion that these entrepreneurs have for their ideas. Johnathan Lee, vice president of commercialization and ventures at Cradle Fund, recently told ZDNet Asia that most investors are “skewed” toward “brick and mortar companies because they are more familiar with that.”

Lee finds that most investors are much more comfortable investing in more traditional “real estate, public-listed equity and financial instruments” than in innovative, disruptive ideas. The fact is however, that only these disruptive and risky ideas truly have the power to make Asia a player in the global marketplace. We’re not going to get there with the Asian equivalent of Wal-Mart.

The mass adoption of crowdfunding will help provide much-needed capital to entrepreneurs. Probably more importantly, it will also convince VCs and Angels, over time, to trust their instincts and invest in ideas that in many cases, at first blush, may seem less than a sure thing – but that are proved viable through the wisdom of the crowd.

The fact is, these tech entrepreneurs need capital to see their ideas to fruition, and the only viable option for many now is to package their product to investors only after having already proved that the market is ready for it.

To that end, Asia is making some great strides. Most notable was the recent launch of Singapore-based site Togather.asia. When founders Bryan Ong and Mark J. Cheng tried to publish their motivational book “It’s I’MPOSSIBLE” they realized the need for capital to bring their book into the world, so they launched Togather.asia to fill this funding gap in the Asian market.

On August 8, Togather.asia helped raise $2,500 for Indonesian band The Tree & the Wild. While this is certainly not Kickstarter’s “Pebble” and the project was not tech-based, it’s an excellent start and exactly what the market needs to convince innovators that they can focus on innovation and the funding will materialize.

Other companies such as Firecracker, Spark Facility, 8squirrels and pozible seem to be springing up almost every other day and show that there is a growing interest in crowdfunding in the region.

Similarly, Indonesian site Wujudkan has focused on the creative industry, helping filmmakers Mira sx

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Column Jason Carlos.indd 134 9/20/12 3:19:50 PM

October 2012 GlobeAsia 135

By Jason and Carlos Fernandes

Lesmana and Riri Riza raise an ambitious $32,100 for a movie project titled Atambua. Co-founder Mandy Marahimin correctly gauged the value of this first high-profile project and worked hard with the rest of the Wujudkan team to help the filmmakers raise their funds – on occasion even meeting prospects in person.

What they have for their efforts is essentially a proof of concept that will bring crowdfunding to the fore as a viable option for entrepreneurs attempting to raise funds all over Asia.

Governments must get on board Crowdfunding is a great way to fund ideas that people are passionate about, such as music or movies – but for crowdfunding to truly take off here, new legislation must be passed. Asian governments must make it possible for investors to buy what amounts to an equity stake in companies. This will allow investors to truly participate in the growth of the company and not merely purchase a product and hope it delivers on time.

This evolution is even more crucial for a region such as Asia, which historically has encouraged entrepreneurs to try to raise funds from friends and family in order to grow their businesses. Equity-based crowdfunding is a natural progression of this very long-standing Asian concept. Unfortunately, this method of crowdfunding is still in its infancy even globally.

It was only as recently as August 30 this year that the Securities and Exchange Commission of the United States outlined rules that allow start-ups easier access to capital. These rules were written to comply with a provision in Obama’s JOBS act that lifted the ban on “general solicitation,” allowing start-ups to publicly ask for funds without registering as securities with the SEC.

This regulation has thrown the doors

wide open for websites specializing in equity crowdfunding, and encouraged them to get right to work helping entrepreneurs raise money.

Websites such as Funders Club and Early Shares are just getting established globally and the idea hasn’t quite taken in Asia, not least of all because of the lack of crowd-friendly investment legislation. Regulations in Malaysia for example, do not even allow crowdfunding in exchange for equity. Rules pan-Asia are equally restrictive.

Unfortunately, while a model such as Kickstarter might work for a company that specializes in consumer products or social ventures, it is completely useless in raising money for any company that needs to grow, but is not able to sell a product to the mass market to do so.

The downside of equity-based crowdfunding is that these investors might not be as sophisticated as VCs in evaluating the financials of a business plan. There might also be a lack of transparency vis-à-vis where the money raised is spent. Probably more importantly, how does one wrangle all these disparate investors with their different appetites for risk and different amounts invested, and come up with a unified voice on the future direction of the company?

Sites like Funders club and EarlyShares might have answered a few of these questions, but the method of implementation, in general, across the equity crowdfunding community remains to be seen.

Can crowdfunding replace more traditional forms of funding?Equally importantly, founders and entrepreneurs should realize that equity-based crowdfunding is not a replacement for the “smart-money” that comes with investment by Angels or VCs. Both angel investors and venture

capitalists bring valuable experience and due diligence to the start-up ecosystem that cannot be underestimated.

Perhaps more importantly, the mentorship that angels and VCs provide is not replicated in the equity-based crowdfunding model. According to EarlyShares CEO and co-founder Maurice Lopes, people are completely missing the point with crowdfunding.

He says: “These are deals which would never get in front of a VC or an Angel, and the only way they will get there is if a CF round is successful and the company can prove it’s [sic] concept.”

Lopes believes crowdfunding addresses a gap in the market that is not filled by traditional funding mechanisms. Whether entrepreneurs will use this mechanism as a stop-gap measure, or a complete replacement for traditional funding, remains to be seen – but clearly the industry is in for some very disruptive changes.

Crowdfunding has immense promise in Asia, both due to longstanding cultural factors and also because of the current financial environment. While Angels and VCs are licking their wounds from the financial crisis and banks are still unenthusiastic about lending to tech companies, crowdfunding might well emerge as the single factor that keeps entrepreneurs working and the wheel of innovation spinning.

Regulations must be passed which ease access to capital for struggling entrepreneurs, if the entrepreneurial spirit is to be maintained and grown. We live in interesting times indeed.

Jason Fernandes is an India-based

entrepreneur in the process of

reinventing the clock.

Carlos Fernandes is a singapore-based

entrepreneur in the media space.

Column Jason Carlos.indd 135 9/20/12 3:19:51 PM