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FEATURE: Crowdfunding Goes For The Frontier As Model Evolves

Tom Burroughes

24 June 2015

Crowdfunding can sometimes appear to be a largely Western phenomenon but innovation is afoot to use these networked techniques of capital-raising for budding entrepreneurs in regions such as West Africa.

And with hard work and a bit of luck, some of the beneficiaries of this form of alternative financing might become high net worth individuals in the future if, or when, they sell or float such businesses. It therefore makes sense for wealth managers to pay attention.

One of the latest crowdfunding outfits to join a trend that has seen the likes of Crowdcube and Seedrs become prominent is , a UK-based organisation incorporated last year which officially launched for business about two months ago. This platform provides equity and debt financing to established businesses (it tends to only deal with firms that have a strong track record in select frontier/emerging market countries). “Frontier” markets are typically riskier and less well developed than emerging market countries are – there is more risk, but also larger possible returns to compensate for it. Examples of the former include (using MSCI methodology) Argentina, Bangladesh, Kenya, Mauritius, Morocco, Nigeria, Pakistan, Ukraine and Vietnam. Emerging markets are nowadays more familiar stamping grounds for investors, such as Brazil, Russia, Poland, India and Malaysia.

The “crowd” approach to investing enables people to put money into direct businesses, for relatively modest individual amounts, and thereby help those entrepreneurs who might otherwise struggle to win money from banks or larger investment houses, Will Tyndall, a co-founder of Emerging Crowd, told this publication recently.

Tyndall, who created the platform with business partner Lucien Moolenaar, outlined Emerging Crowd and what its model is. In his recent business career Tindall has worked in Asia helping to raise money for companies; he came across regular examples of firms that would not be thought of as difficult prospects struggling to obtain relatively small sums of money. As for Moolenaar, he has spent six years in senior leadership positions at Renaissance Capital and Merrill Lynch.

The platform provides equity and debt financing to established businesses (it tends to only look at established businesses that have a strong track record) in select frontier/emerging market countries. Such firms are of the kind that would typically struggle to get the kind of funding from other sources because the amounts are typically too small for, say, a large private equity house, or a bank.

“We are trying to bring best practice from capital and public markets to this field,” Tindall said. “There are proper disclosures and investor protections,” he said, citing such features as pre-emption rights and tag-along rights.

Emerging Crowd is open to retail, high net worth investors and institutions. Retail investors are subject to certain restrictions as set by the Financial Conduct Authority, such as not being able to invest more than 10 per cent of investable wealth in a crowdfunding firm in a 12-month period. The minimum investments size is £500 ($793). Tyndall stressed that investors qualify for the same protection regardless of how high/low the amount they invest.

All the firms on the platform are mandated to provide a minimum of audited accounts on an annual basis and quarterly investor updates, although they are encouraged to report on a more regular basis.

Angels, shadows and crowds
This platform is part of a broader trend of new forms of capital-raising networks and channels opening up, sometimes deliberately designed to fill the gaps left by banks that, often because of tougher capital rules and compliance processes, no longer want to finance SMEs and apparently risky ventures. Sometimes – not always fairly – dubbed “shadow banking”, or more neutrally, “alternative financing”, this sector is proliferating in countries such as the UK and US. (For a view on how this market is evolving in the UK, see this article here.) Only last week, a group of former senior managers launched a hedge fund called Firebreak Capital in the US, designed in the words of its founders to be an “alternative balance sheet in the illiquid lending and investment sector, leveraging the emerging disruptive trends in consumer and commercial direct lending, as well as providing private credit, asset-backed and structured finance solutions”. There are “angel” networks of various sizes offering financing/mentoring to small firms and startups, as well as a plethora – particularly in the US and increasingly in Europe and elsewhere – of venture capital firms (such as renowned VC houses in the US such as Silicon Valley’s Sequoia Capital).

The equity crowdfunding (not including debt) market in the UK is worth an estimated £50 million a year – so it is still a drop in the ocean when set against more traditional forms of financing. The pace of change, and the involvement by the UK regulator to scrutinise crowdfunding to prevent abuses, continues to drive attention.

Work is being done by academics to get a handle on its long-term potential (as well as understand some of the risks). Nir Vulkan, who is associate professor of business economics at Saïd Business School, University of Oxford, has been granted funding from the Kauffman Foundation and Nesta to explore the business of equity crowdfunding. Working with Thomas Åstebro from HEC Paris, the 18-month project will explore the criteria for success for crowdfunders and how investors make decisions on what projects to back. (The study is being conducted on , a prominent European leading equity crowdfunding platform.)

As far as Tindall is concerned, despite all the noise around crowdfunding, he is not aware of other FCA-regulated platforms such as Emerging Crowd that operate in the emerging/frontier markets space. He intends to make the most of that “first-mover” advantage.

“We currently have two companies live on the Platform, but have a large number in the pipeline that we will bring on board over the next couple of months,” he said.

The firms' funding
At present, Emerging Crowd has two businesses receiving investor backing: BOZZA MEDIA, which is a global online marketplace designed for African artists and consumers - mixture between iTunes and Netflix, and NEO, which Tyndall described as Nigeria's largest and fastest-growing coffee shop chain – the African “Starbucks”.

“Typically we will only look at equity deals that have a convincing exit story within three to five years. The maximum term we will consider for debt is four years although the majority are likely to be three years,” Tyndall said.

Tyndall is keen on Nigeria – with Kenya not far behind. “Nigeria is in a unique sweet spot for investors right now. This month’s smooth transition of power from one democratically elected president to another is a potent endorsement of its political stability, and the falling oil price has spurred its vast economy to diversify rapidly,” he said. (He cited data from the World Bank and other sources giving Nigeria a 5.5 per cent GDP forecast for 2015 and Kenya at 6.4 per cent.)

“Thousands of entrepreneurial young companies are springing up – and with such a huge and untapped market on their doorstep, the best have extraordinary growth potential. With the Nigerian currency now 14 per cent cheaper against the pound than it was a year ago, the country’s stocks represent exceptional value to investors who are keen to broaden their horizons into frontier markets,” he continued.