Crowdfunding: Opportunities for Azerbaijan and Israeli experience

Crowdfunding: Opportunities for Azerbaijan and Israeli experience

Over the past few years a new way of funding ideas and projects, called “crowdfunding”, has emerged. Crowdfunding uses a group of people, “the crowd”, to pool resources together in support of a specific project. There are two main crowdfunding models. One model is based on equity stakes whereby people contribute to a business or a project in exchange for equity; the other model is based on payment-in-kind where people donate to a project in exchange for tangible, non-monetary rewards such as goods and services.

A relatively new phenomenon, crowdfunding is booming worldwide: as of April 2013 there are 452 crowdfunding platforms active worldwide. Donation based crowdfunding has seen tremendous growth over the past couple of years. Deal flow continues to rise and there is a steadily growing demand to participate in Israel’s startup culture, and not just through investing in public stocks or mutual funds.

Since 2012, Azerbaijan’s governmental and private entities are actively pushing to increase the investment and support of start-ups. Lack of investors in non-oil sector in Azerbaijan is a main challenge in developing start-ups in Information Technologies and Science sectors. At the same time, there is a lack of business ideas for investing by local and foreign investors; most scientific and IT ideas are either unsustainable or too risky for investing and promotion in local and international markets. Only few attempts by private (Barama) and governmental structures (High Tech Park) have been realized during the last several years, but most of start-ups fail after their incubation period due to lack of investors. Established by the Presidential Order dated 15 March, 2012 Azerbaijan State Fund for Development of Information Technologies will start to provide funding to ICT projects in Azerbaijan from 2014.

In this article we would like to provide detailed information about how Israeli startups receive funding and support from crowdfunding platforms. The aim of the article is not come up with the list of suggestions, but rather to show crowdfunding’s importance to economic development; specifically of ICT, sciences, and many other sectors in Azerbaijan.

Israel’s experience:

Israel’s crowdfunding platform is equity based and built for an exclusive group of accredited investors to provide venture capital funding for venture capital startups. Membership in the community is vetted and offered to people who meet the stringent accreditation criteria. Accredited investors who are accepted into the community are encouraged to make a minimum investment of $10,000 per deal. The initial focus is on the dynamic early stage market and only companies that have diligence process should be added to the platform.

The crowdfunding platform is building a much needed new venture capital strategy for providing adequate and efficient capital to fast growing startup companies. Commitments of traditional venture funds are down, and many funds are avoiding early stage engagements. Investors are increasingly unwilling to make large financial commitments to traditional funds with their substantial management fees and carriers.

Crowdfunding platforms offer their members the services and management of venture capital organizations combined with the flexibility and choice of an investor, who then will be able to choose those companies that interest him and make individual investments. The fees and carriers of crowdfunding platform are significant lower than those associated with traditional venture investing.

Crowdfunding platforms admit accredited investors and form individual limited partnerships for each investment by protecting startup companies from the nightmare of handling a large number of small, inexperienced private investors. The platform selects each deal for which money is to be raised.

Each investor will be provided with materials about the startup company, among which include a presentation, an analysis, deal terms, team background, a meeting with a company representative if requested. Investors can invest minimum amount in startup company and there is no limit on the funds that companies are able to raise per partnership. Moreover, crowdfunding platforms provide the startup companies and investors a framework to raise and invest additional funds for future rounds.

Investment risks stem both from the risks associated with making investments in early stage companies, and from more specific risks related to investments in a specific portfolio startup company.

Recommendations:

Experts suggest establishing a crowdfunding platform specifically for Azerbaijani start-ups, which are unable to use international crowdfunding platforms for attracting investments. The Azerbaijan State Fund for Development of Information Technologies should become one of the main actors on development of such platforms in Azerbaijan and provide the investment to ICT and Science sectors through such platforms as well. The investment by governmental agencies and funds in startup platforms will encourage both individuals and private sector representatives to invest in start-ups.

Dr. Yuri Yakub – Wazana Group Ltd. (Israel)

Ilyas Safarli – Uluchay