It is rare enough that a Dubai-based financial venture sees Lebanon as one of its key target markets and is eager to set up a Beirut office during these confusing times. It is rarer still that a new option is offered whereby Lebanese entrepreneurs can access that extremely scarce resource: affordable equity funding. The conflux of these two factors in the new crowd investing platform Eureeca in itself makes the venture worth looking at, even as their particular version of the crowdfunding concept, which claims to be the first “global solution” of its kind, raises its own cloud of questions.
For small and medium enterprises (SMEs) in Lebanon, the venture wants to serve as a vehicle to raise equity in an open-access private placement structure. From the perspective of financial markets, Eureeca hopes to complement established but very restrictive funding organizations such as investment banks, venture capital and private equity players.
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The company could be a positive threat to established capital raising practices handled behind closed doors in investment banks, says Eureeca’s general manager Sam Quawasmi, a former investment banker. “The internet disrupted a lot of businesses and a lot of sectors over the last decade but finance has not been disrupted yet. I think that crowd investing will disrupt the way in which finance is being conducted right now,” he says as he explains his passion for the enterprise. “What I like about it very much is changing the way of finance to a much cleaner, newer way of finance. It will provide a mechanism where raising capital or selling shares will happen in a much cleaner and more transparent manner.”
Eureeca launched operations in May, about a year after first announcing itself as a startup in beta testing. On both occasions, the company’s cofounders — Quawasmi and business partner Chris Thomas — made well-orchestrated marketing noise in local and regional media. A third jubilant publicity push came in early July when Nabbesh.com, an online skills matching site, achieved its funding target of $100,000 after a 12-day equity raising campaign on Eureeca.
Nabbesh was promoting itself beside two other companies on the platform in Eureeca’s first round of sparring with potential investors. There was no PR push and no statement on the site in August when the 90-day fundraising period for the other two companies expired without them having reached anywhere near their respective equity raising targets of $300,000 and $630,000.
However, the flop rate is calculated and in the long term will probably be much higher than two out of three. Like in all appeals for capital to angel investors, venture capitalists or private equity players, failures will always outnumber the successes also under the crowd-investing model, Quawasmi concedes. He sees a 25 percent success rate as possible, an optimistic estimate when compared with the humble success rates that SMEs have in conventional capital raising, often around the single digit percentages.
According to Quawasmi, the companies that Eureeca wants to see on the platform are to be operational and revenue making. This means there is room for nascent business plans but indifference to funding less profitable personal education or music projects — the norm on the largest crowd funding sites, Kickstarter and Indiegogo.
The company expects that the first year of operations will yield some 20 to 30 successful funding events out of 70 to 100 companies that would appeal on the platform for equity. The minimum investment that each company is supposed to look for is $20,000, but there is no upper limit and the preferred ticket size is well above the minimum. “Our sweet spot is between $2 and 5 million in terms of valuation of companies who are looking to sell 5 to 10 percent [in equity] in exchange for $300,000 to $500,000,” says Quawasmi.
Companies should not expect to rely on an online version of cold calling to reach such targets. Statistics quoted by Eureeca show that the first tier of the funding crowd comprise relatives, friends, clients and existing stakeholders who contribute 30 to 40 percent of the investment that the company seeks. Attracting a second tier of investors relies on the buzz that the internal crowd of family, friends and fans generates around a company.
In Quawasmi’s opinion, the close relationship between equity seekers and their internal crowd also makes it less likely that fraudulent and pretend ventures will appear on the platform. “When a business like a pizzeria reaches out to its own friends and family and clientele to get them to participate in the success of their approach, we don’t think that the SME would think of defrauding its own friends and family and future client base,” he says but admits to a “high risk of general failure” as Eureeca is in essence “merely a transparent market place”.
Rules of the game
Eureeca’s contribution to the realm of online financing in this sense is an offshore structure that makes crowd investing legally viable for companies from numerous jurisdictions — but one learns by digging into the FAQ section of the site that SMEs cannot apply if they are based in Saudi Arabia, Japan, the United Kingdom, the United States or “any country on the Financial Action Taskforce list”.
Money laundering watchdog FATF issues two lists of no-go and strategically deficient countries. Iran is one of two in the first category along with North Korea; the second category currently has 12 countries, among them Yemen, Syria, Turkey, Pakistan and Indonesia. Eureeca’s count of 18 barred jurisdictions means that not only the world’s most vibrant entrepreneurial ecosphere, the US, is excluded but so are sizeable chunks of the Middle Eastern and Islam-centric markets.
To be prepared for scrutiny by suspicious authorities such as FATF, Eureeca is protecting itself against running afoul of anti money-laundering rules by a layer of one-time compliance checks that investors have to undergo. To be active on the site, investors have to pay a $15 fee for the third-party compliance service. Equity seekers also have to undergo “certain due diligence and compliance checks,” Quawasmi says. “Both parties in this game will be compliant.”
There is no indication that the business model includes any assumption of liability for the investments that are promoted. Other than accommodating SMEs with room to display their business plan documentation and projections, Eureeca stays clear of scrutinizing company financials anzd such things. It alerts its equity seekers, however, to their legal responsibility to “act truthfully at all times” and provide “clear, honest answers” to all questions from the investor crowd.
The Eureeca operational philosophy then is crowd rule based on the assumption that, as Quawasmi puts it, “money is efficient. We leave it up to the entrepreneur to apply his own valuation, whether through an independent party or not. It is completely democratic.” He expects to see companies approach the platform with over- and understated valuations but insists that it will be up to the market to believe or disbelieve these valuations.
Under the all-or-nothing principle, the equity seeking company will receive the collected funds only if the full target is met. The success orientation of Eureeca means the platform owners get paid only if the full funding targets are achieved. Only in this case, they take a cut of 7.25 percent from the total while the investors receive shares in correspondence to their investment.
These shares, under current setup, are not tradable in any form, Quawasmi says, meaning that investors who want to divest have to offer them to the issuer and are not allowed to sell at all if the issuer declines to buy and gives no permission to sell to a third party.
These and other policies and standards, however, appear to be works in progress along with other aspects of the operational formula — such as a system to rate investors or the company’s recipe for attracting franchisees which would represent and promote the platform under some kind of profit sharing formula in geographic territories. Another option is partnership with an insurer that would underwrite the risk investors take on the platform.
The ambiguity of some points is not surprising. Crowd investing guidelines, regulations and best practices are currently in the early phase of formation across international markets if legislators and regulators have even looked into them. On the practical side, the biggest project funding success stories so far were the $10.3 million raised in 2012 for Pebble, a smartwatch, and $12.8 million raised last month for Ubuntu Edge, a smartphone. Both campaigns offered their product-to-be to donors but the Ubuntu campaign, although being the top-grossing crowd funding story to date, reached only 40 percent of its target and effectively didn’t get any funding out of the effort. This example alone speaks to the need for entrepreneurs and platform operators to get smarter on the processes and develop the options that will make basic crowdfunding perform in the long run, let alone the need for more complex crowd investment methodologies where commercial transaction parties, investors, financial watchdogs and a plethora of national regulators and legislators are stakeholders.
Eureeca, which according to Quawasmi raised capital of $3.25 million from a crowd of 17 investor-shareholders before its launch, is coming to Beirut with plans to have an office up and running within this or the next quarter. One of its selling points to the local market is that high-profile financial head Nasser Saidi is an investor and deputy chairman of Eureeca’s board of directors. Featured in the testimonials section of the Eureeca homepage, Saidi’s comment on the company reads, “Eureeca.com enables the enablers.”
The marketing mantra that Quawasmi and Thomas use in communicating their company is total confidence that crowd investing will become an integral part of the financial industry within the next decade. “I think in 10 years’ time we will look back and ask how on earth did we exist without crowdfunding and crowd investment?” enthuses Quawasmi, who is not averse to being considered as a contender for the next Arab internet billionaire.
