Democratizing financing: Crowdfunding in Mexico

Crossposted from the FOMIN blog

The great potential of crowdfunding in Mexico attracted more than 100 people to a recent launch event for the first detailed analysis of this emerging financing model for entrepreneurs, soon-to-be entrepreneurs, small businesses, artists such as filmmakers and musicians, and even people interested in social development. The premise of this kind of collective fundraising via online platforms is anything but modest: Democratize financing so that anyone with a great idea can implement it. Can it fulfill this promise?

The event, organized by the MIF with support from the Institute of Entrepreneurship in Mexico at the Ministry of Economy, gave me every reason to believe so.

Crowdfunding in Mexico is just over two years old. I remember when we held our first workshop on crowdfunding last year in Washington D.C., the first platforms throughout Latin America were only starting to pop up.

Now, as the report on Crowdfunding in Mexico we launched at the event shows, the market is maturing and already looks more like this:

A group of five platforms, Idea.MeCrowdfunder.MxFondeadora.MxKuboFinanciero.com, and Prestadero.com, have joined forces to create the Mexican Association for Crowdfunding in order to promote and defend the interests of this growing industry and establish best practices to protect their clients in running crowdfunding platforms.

Of course, developing a new financing model, born out of the increase in the use of social media by the wider population, has its challenges. A regulatory framework and clear regulations that address the activities need to be established. Tackling risks that come with the use of the Internet as a business platform is in the common interest of many stakeholders, banks as well as crowdfunding platforms.

But the success stories are convincingly beautiful. From the platforms that are part of the Mexican Crowdfunding Association alone, 140 projects and companies have been successful in financing themselves, about 44% of those published.

One of them is Tania Ortiz, who launched a campaign via Idea.Me to seek funding for her newly formed fashion accessories business, TANgerine. Now, her latest collection can be seen on the streets of the hippest neighborhoods in Mexico City. (More success stories here).

The private sector has discovered the potential of crowdfunding as well. For example, Leo Schlesinger, CEO of the wood products company Masisa, has collaborated with the portal Fondeadora.Mx to launch #MasisaDetona, a project to engage young entrepreneurs to produce innovative and sustainable products. More than 200,000 joined the Facebook group alone.

Finally, looking at the percentage of women businesses in venture capital and crowdfunding confirms that crowdfunding can indeed democratize. While only about 4% of businesses that receive venture capital in the US are women-owned, 40% of successful crowdfunded businesses have women at the helm.

These experiences and the energy and enthusiasm of the platforms and organizations that we met here, make me believe that exciting times are to come.

What do you think? Have you participated in crowdfunding yet, either as a funder or seeker of funds? Will crowdfunding fulfill its expectations? Let me know in the comments section below!

adding value to crowdfunding projects in Latin America

A couple of weeks ago, at the Multilateral Investment Fund, where I work, we organized a workshop on crowdfunding together with massolution (a great look-back at the workshop and the third-level survivorship model of crowdfunding here). I still wanted to share a couple of thoughts on the principal elements to keep in mind when considering to bring crowdfunding to Latin America, especially when thinking of the potential social impact of this crescent funding mechanism.

I have already discussed some ideas on social impact and opportunities in a post leading up to the workshop. I was happy to see some of the elements, especially the focus on education, which is also to be considered as an elementary driver of development, strongly confirmed. It was great to learn Kiva has been expanding into funding education loans and other related projects.

In this post I would like to look at these key issues: the challenge of adoption and access; and creating added value of crowdfunding models.

1) Adoption and access challenge

As massolutions writes, crowds are essential for crowdfunding. Luckily, the crowd in Latin America is growing. Spanish is the second most written language on Twitter. Statistics show that Latinos are using social networks more than the overall average.

Now, to make the crowd engage in crowdfunding your very own business idea is the more challenging part. Especially to go beyond friends and family, and friends of friends, to what Kevin Berg Grell calls third-level survivorship and describes better than I could:

The key to success, however, is being able to pass third-party survivorship. The earliest of backers will often contribute to a campaign because of the emotional attachment to the owner or a person involved with the project. Their friends may also be more inclined to support a campaign if they have a loose connection to it. As the backers become three or more levels removed from the owner, however, the decision to fund becomes a rational one. If that owner can convince a large group of strangers that the campaign is worth backing, it is a good bet that the crowdfund will succeed.

The overall potential of backers for your business can be described through the following s-curve:

This image also makes evident an additional element that needs to be considered when thinking of crowdfunding in Latin America. And this is related to access to the internet, and how it affects the total potential of adaptors. Both for the potential backers, but also, for people with ideas, potential entrepreneurs. In Latin America, there is still a notable group of people who do not have the same level of access to the internet, and to the services. Here, an opportunity arises to create for example local organizations that can serve as innovation hubs bridging the online-offline gap. Or thinking of ways to bring these ideas to rural areas through a dedicated portal that uses mobile technology. Here, I think development organizations can provide value-added in supporting this infrastructure.

Which brings me to my next point.

2) Value-added crowdfunding models

As an ecosystem around entrepreneurship is just developing, including services such as how-to-create-a-business seminars, or start-up financing, platforms will want to work with entrepreneurs and small business to provide this value-added and ensure sustainability of their projects: training, mentoring, and guide their projects through the process.

This might also provide an opportunity to justify fees that can be inverted in running the platforms. Or it might provide an opportunity for businesses interested in impact investing to partner up and create challenges that provide co-financing for successful ideas, or, why not, a bank as a partner. Idea.me, the largest platform in the region, has been doing this already to a certain extent.

Another topic will require some exploration as well. While the kickstarter-type of crowdfunding has certainly set its foot in the region, equity-based  models are still only nascent. Cumplo in Chile, and Crowdfunder in Mexico is getting ready for launch. For small businesses, the “missing middle” between microfinance and bank loans affects about 65%. Equity-based crowdfunding has definitely a role in the market of providing finance to growing businesses, amidst the venture capital industry, and still the most common form of start-up funding that originates with friends and family members.

What other elements do you think are crucial to be tackled to make crowdfunding work in the region? How can the infrastructure gap be addressed?

developing social impact through crowdfunding in Latin America

Crowdfunding in the US is buzzing. And while the crowdfunding crowd is anxious as to when the SEC will put JOBS Act regulations into place, there is few doubt that the market will grow even further. In Latin America, however, crowdfunding is just gathering momentum with about 40 online platforms established over the last couple of years.

That’s why I am excited to meet some of the leading and most interesting crowdfunding platforms next week, including Idea.me and Crowdfunder in Mexico, and Kiva, Global Giving and Solar Mosaic who have been working in the region. With CommunityLeader, Rebirth Financial and When you Wish, there will also be some US based platforms sharing their experiences. At a workshop at the Multilateral Investment Fund, we will discuss the potential of crowdfunding for Latin America. The different models that we’ll be looking at are those that offer non financial incentives, such as donations and rewards, and platforms that promise financial returns through equity or debt-based models. I am very grateful to Kevin Berg and Carl Esposti of crowdfunding think tank Massolution to have helped design the workshop and gather this great group of people for a surely inspiring day.

The crowdfunding market

The global crowdfunding market had raised about $1.5bn in 2011, with most of the money coming from North America and Europe according to research by Massolution. Still a relatively small amount comparing it with the microcredits market for example, that only in Latin America has reached a record high volume of nearly US$ 19bn in 2011.

Most platforms in Latin America are concentrated in Brazil, with the remaining based out of Chile, Mexico, Colombia, Argentina, and Uruguay. And while the development is only blossoming out, the first numbers of these platforms are encouraging.

The largest platform in the region, Idea.me already has funded 175 projects in Brazil, Chile, Mexico, Colombia and Argentina. Agreed, not that much, given that Kickstarter, the largest crowdfunding platform hosted 34,000 successful projects in 2012. But looking at some of the projects supported, I think these are 175 projects that would not have found funding otherwise.

Cumplo Chile, an equity lending platform in Chile, has had a transaction volume of US$ 500k in only half a year of its existence. It is struggling with regulators to keep in business, but it underlines that there is a need for alternative financing models.

The projects

This great infographic by leading Brazilian platform Catarse shows which areas received most interest. Generally, most of the projects looking for funding on these platforms are in the field of creative arts, films, books, music albums and the like. In Argentina, BananaCash funds only art and cinema projects. And how can you not love great design projects, or projects that connect visual design with urban development, such as the map of public transport in Dhaka that I supported last year. But not everything are creative projects, as this selection of the most interesting projects on Idea.me in 2012 shows, or what can be discovered on Mexican platform Fondeadora.

Working at a development organisation that supports economic development to, eventually, reduce poverty, one of the challenges that I am most curious about is how crowdfunding can be used to improve small businesses and entrepreneurs at the bottom of the pyramid.

Social impact of crowdfunding

Crowdfunding will definitely be an increasing opportunity for the growing middle class in the region to start businesses through equity and lending models, and fund creative projects, and help close the gap between microfinance, bank loans, and angel investors.

While Kickstarter has not included a category of projects that might affect social development, Indiegogo does so by the way, some reward-based platforms such as Idea.me allow to tick the social impact box. An interesting project funded last year on the website was a community workshop for bicycles, Enchúlame la bici. Other platforms, such as Acciones DF, provide a platform to crowdsource ideas to improve the urban development. And in Colombia, Donacciones is a donation-based model that looks exclusively at social projects. The Brazilian platform Impulso focuses on micro-entrepreneurs.

So how can these models trickle down to the poorer populations? Which are the sectors that could provide benefits?

While platforms of social crowdfunding such as Donacciones in Colombia is covering a multitude of sectors, on more general platforms areas such as solar energy, education and urban development seem to be the most promising ones.

Sustainability and Environment, especially solar energy, and funding for projects that bring solar energy to poor communities, is addressed by two main platforms: Sunfunder, that crowdfunds solar projects in off-grid communities around the world, and Solar Mosaic. With solar panels providing energy, Solar Mosaic is even exploring to deliver returns through creating a mutual fund. This model could very well be adapted to the developing world. Green projects seem to be popular and successful as well.

Urban development is an area I care a lot about. I think community driven projects that benefit both poor and less poor populations can have big impacts, such as local infrastructure for basic services, energy, bus maps, a bike shop that employs young people in the community with their first job, or classes for young handicapped people. In Chile, UrbanKIT supports community based projects, such as street lights and news boards. In this field, the line between crowdfunding, crowdsourcing, and community projects and platforms such as Acciones DF or Viral is becoming less clear.

Education and supporting higher education for students is a field that has been around for longer. The social enterprise Lumni for example, also funded by the MIF and present in Chile, Colombia and Mexico in Latin America, allows investors to support students through loans.

Diaspora financing: Another concept is to engage the diaspora. Through this model, the crowdfunding platform Zafen, counting on support from the MIF, allows to donate money to projects in Haiti, as well as support small businesses through loans.

These are just a couple of ideas how crowdfunding can be applied to social development, and bring financing and projects to people who have less access to it. As with microfinance, it probably will not be a silver bullet for development.

But it seems to me that there is a huge potential to explore this emerging form of peer-to-peer economic development, and create benefits for an even larger population. Especially the next generation, young entrepreneurs with innovative ideas, a sense for the social world of the internet, and the wish to take the future in their own hands, might just use crowdfunding to start off their business.

What do you think? How can crowdfunding benefit poorer populations and informal businesses? What sectors will best benefit from these new funding models? What needs to happen to make this work?

I hope to have some new insights next week, after the workshop!

By the way, for those who understand Spanish, last week I did a short interview on crowdfunding in Latin America for CNN en español.

crowdfunding en América Latina

Por mi trabajo en temas de innovación social con el FOMIN, fui invitado a comentar sobre financiamiento colectivo de Gabriela Frias en CNN Dinero hace una semana. Hablé un poco sobre qué es, qué tipos de crowdfunding hay, como regular este sector creciente, y las perspectivas de su desarrollo en América Latina.

La grabación se puede ver aquí.

my year on kickstarter: crowdfunding development, products and movies

I must say, this year I got a bit lost on what I funded and backed on Kickstarter. Solar power, urban transport maps for Dhaka, relationship movies, magnetic comic strips. Quite a random selection of fun, intriguing, intellectual and useful projects.

In this post, I wanted to look a bit more in depth into what I have supported on the crowdfunding platform Kickstarter. Both to get an overview for myself, and to reflect on what this new form of funding means to me, and might bring for the future. I haven’t backed big amounts, or a huge number of projects. I guess, I am kind of an average backer, with US$ 199 among 5 projects. An average of US$ 40 dollars per project. But it has triggered a couple of thoughts around:

What does crowdfunding mean for international development? How driving local economic development might be supported by crowdfunding platforms? And what it means for specific products and industries?
Here’s a list of projects backed.

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