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Should Southeast Asian Entrepreneurs Consider Equity Crowdfunding?

Indiegogo’s expansion into the space will give the option greater visibility

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BY Ezra Ferraz - 09 Dec 2016

PHOTO CREDIT: Getty Images

Most people associate crowdfunding with patronage: In return for somebody’s financial contribution, the entrepreneur gives a reward – sometimes as small as a token – related to his endeavor or project.

Indiegogo’s recent announcement that it is opening its doors to equity crowdfunding changes things. Now the person who backs a campaign can actually claim an ownership stake, however small, in the company.

Equity crowdfunding has existed for some time now, but Indiegogo’s expansion into the space will give the option greater visibility, even in Southeast Asia. With the advent of equity crowdfunding in the region, entrepreneurs who raise funds via traditional reward-based crowdfunding now weigh in on what others need to know.

What equity crowdfunding is and isn’t

Max Hasan, the advisor of Indonesia-based Topiku and Strategic Initiatives Manager at Kiva.org, a microfinance crowdfunding site, made it a point to distinguish who should seek reward-based crowdfunding versus equity crowdfunding. The former, he explains, works well for entrepreneurs with consumer-facing products.

“You need financing but you also need customer acquisition and marketing exposure; you also have a reliable supply chain operations in place that will allow you to fulfill orders in a timely fashion in anticipation of a high-demand product,” he explains.

In contrast, equity crowdfunding, of the kind Indiegogo is now offering in addition to its traditional reward-based crowdfunding, is better for entrepreneurs who have much clearer financial projections and are therefore more open to giving up a stake in their company.

“You anticipate a period of high growth 20%+ YoY growth, are comfortable diluting ownership and can promise investors a 5x return on their capital or higher,” he says.

For Topiku, which upcycles one-of-a-kind hats, Hasan chose reward-based crowdfunding through Kickstarter. He claims it has a pretty tolerant, de facto beta testing customer base by which to iterate on.

“If it weren't for Kickstarter, Topiku would not have redesigned our product line for this reason. At the same time, we now have assets by which to build new product design and new marketing initiatives upon,” he says.

In response to how entrepreneurs can choose between rewards-based and equity crowdfunding, one founder suggests that the two can be looked as stages, rather than as an either-or proposition.

“I would assume that the ideal scenario is to go through typical crowdfunding, so that you can acquire measured success before approaching equity crowdfunding to secure the necessary funds for sustainability and growth,” says Singaporean Erwin Lian, the founder of The Perfect Sketchbook, for which he raised $53,000 on Kickstarter.

The story is still the same

There have been more than a handful of high profile crowdfunding projects that have gone belly up, failing to deliver a product or even any of the rewards promised to backers. Such episodes have incited a ruckus from backers, with some calling for refunds and others going so far as to file lawsuits.

If such clamor already occurs with reward-based crowdfunding, the risk of backlash is even greater when they actually have an ownership stake. Sydney Shi, the cofounder and product manager of AICO, which is based out of Singapore and raised $110,000 for their universal remote, believes that equity backers are more sophisticated than reward-based backers.

“Backers of traditional crowdfunding are from the general public which is only concerned about the product features versus price, mostly,” she says.

In contrast, equity backers are more concerned with the company’s potential growth, in careful consideration of industry trends. Yet even if they may be more sophisticated, the danger is still there, as Lian notes.

“Without underwriters, both the startups and investors may assume more risks when working with one another,” he says.

But to even get to this point, equity crowdfunders must convince the public that their company is worth backing, and here the best practices are the same as with reward-based campaigns.

Hasan says the number one rule of all campaigns is having a brand story that connects with the company’s specific audience. From there, entrepreneurs must consider what sets the idea or project apart and draw that connection with them.

He used the campaign for Topiku as an example.

“Going back to our target audience of eco-conscious surfers, our narrative drew upon key cues to intimately reinforce the value proposition to the specific audience; this includes everything from visuals, to the aesthetics, to the setting, to the editing, to even the pacing, cadence and language,” says Hasan, who was able to successfully raise $20,000 over Kickstarter.

Would-be equity crowdfunders should take note: Storytelling is still key, and it does not matter whether branded rewards or ownership stakes are on the offer.