Matthew Caruana is Project manager at ZAAR Crowdfunding and at the Foundation for the Promotion of Entrepreneurial Initiatives (FPEI). He is also brand ambassador of the DIFME project.
A recent event organised by the DIFME (Digital Internationalisation and Financial Literacy Skills for Micro-entrepreneurs) project was the springboard for an in-depth international discussion on the alternative finance ecosystem in Malta.
One of the many repercussions of the financial crisis of 2008 is now shaping the entrepreneurial sector. Prior to the crisis, banks took more risks and a bank loan was the default way, and sometimes the only way, to finance the setting up of a business venture, apart from family and friends. Nowadays, banks are more reluctant to take risks with new enterprises, and anyone wishing to set up a start-up will find it very hard, if not impossible, to get the financial backing needed, especially if their business proposal is based on an innovative idea, which might not be deemed bankable.
This is where alternative finance (AF) comes in. AF includes corporate venturing, business angels and venture capital, but perhaps the most popular form in recent years has been crowdfunding. Its increase in popularity is due to several factors. To start with, it is the most transparent, with investors being regularly updated about the progress in funding and about the different milestones the start-up reaches. It is also more accessible, with fewer requirements in terms of documentation or collateral needed than there would be when borrowing money from a financial institution. Another advantage of crowdfunding campaigns is that a new company will automatically gain a base of first customers who will be the first ones to promote the business venture. That is not to say that crowdfunding alone is the only way to go. A business will require different types of financing throughout its lifetime and a crowdfunding campaign can be complemented by other forms of AF, as well as bank support.
At a time when the internet has brought everyone closer and broken down barriers that seemed unsurmountable just a few years ago, we have come to expect greater transparency and for communication to be constant and timely. Fifteen years ago, turning an idea into a profitable business venture meant dealing with an inordinate amount of paperwork and red tape, and finding a bank willing to lend you the money you needed to get started. Nowadays, crowdfunding platforms have made it relatively easy to get the financial backing needed to get started, but budding entrepreneurs still need more than just an idea to fulfill their potential.
While crowdfunding platforms provide a place for entrepreneurs to showcase their innovative ideas, many lack the necessary preparation to take their business proposal from paper to reality. Projects such as DIFME, of which The Malta Business Bureau and the University of Malta are partners, provide the tools needed to educate small entrepreneurs in the financial and digital skills they need to develop their business idea. However, we also need to better inform potential investors. We need to create and promote a healthy AF ecosystem, both in terms of availability and accessibility.
Malta needs an independent platform to help entrepreneurs explore what financing options are available and how to tap into them. Entrepreneurs also need to be given support with matchmaking, helping them meet potential investors and backers. This structure would be the go-to entity for investors and entrepreneurs to meet and collaborate, from idea sharing events to problem-solving events, from pitching to mentorship. Investors, on the other hand, need to be given incentives, both financial and non-financial, to join in through early stage investing and to support start-ups. This needs to be done responsibly and with education, through a platform that helps them, especially since AF made investing more accessible to retail investors with lower barriers to entry.
At ZAAR, which is a donation/reward-based crowdfunding platform, we offer support and information to entrepreneurs wishing to seek funding through us and we also guide prospective backers. Although there are no equity-based crowdfunding platforms yet in Malta, we have been advocating for equity crowdfunding with the MFSA and new EU rules for crowdfunding service providers will be introduced in November.
Our hope is that this will lead to an increased awareness of the potential for investment-based crowdfunding in Malta and that this will in turn make equity finance more attractive and dispel the myth that bank loans are the only way to finance a project. Malta has the potential of being a hub for start-ups, but we can only get there if we find ways to bridge the gap between entrepreneurs and investors, and it all starts with education.