Dan Levin wanted a pita toasted over a gas flame “like back in the day,” slightly scorched and lightly filled. He decided to raise the money for his sandwich, 20 shekels (around $5), through a crowdfunding platform. His project was a roaring success: Levin raised 247 shekels, more than 12 times his target. He promised his happy supporters a big party featuring pitas and snack foods.
If anything, the picayune amount just goes to show how well the method works.
The basic idea is simple: An artist or entrepreneur who is writing a book, recording an album, developing a show, inventing a product, devising a social venture or a revolutionary idea, offers it for presale on the internet, at a low price. Anyone who is interested in the product can invest.
There are options for the entrepreneur to receive whatever was raised (the flexible track), or to only get the money in the event the entire amount was raised by a specific date. To bolster the chance of success, the entrepreneur can offer extras, such as a custom-printed shirt or discount coupons for restaurants.
Crowdfunding has many advantages. Unknown writers or singers can get a push, small entrepreneurs with brilliant ideas can realize the dream. Or not. Make no mistake, crowdfunding has its difficulties, and it assures nothing. The singer may produce an album, advertise it online (at additional cost) and sell none.
The sums raised on crowdfunding platforms usually range from thousands to hundreds of thousands of shekels. The highest amount raised on the Israeli platform Headstart, for example, was over 1.5 million shekels, to build a home for Yehuda Yitzhak, a disabled Israeli veteran. Nearly 400,000 shekels was raised to build a new synagogue in the Golan Heights town of Katzrin named for Tair Rada, a 13-year-old girl from the town who was murdered in 2006. Nearly 600,000 shekels was raised for a musical event to mark the 15th anniversary of the death of singer-songwriter Meir Ariel.
The biggest venture on another platform, Mimouna, was 1.5 million shekels to buy food, medicines and equipment for the winter for Syrian refugees.
Mimouna has been around for seven years. Manager Michal Gad says millions have been raised through it, 60% through the flexible track and 40% through the all-or-nothing.
Through Headstart, about 120 million shekels have been raised so far. Its founder and CEO Yossi Meiri says about half the amount is for music and literary projects. Most fundraisers are for between 35 and 40 days, and the first and last weeks are generally the liveliest. About 63% of Headstart projects meet their goals.
“Understanding the market, and analyzing the target audience and marketing methods are all crucial to the success of the project,” says Meiri. “Don’t think you can launch a project, go to the beach and the money will roll in by itself.”
Projects that fail usually do so because people don’t realize they can press Enter and forget about it, Gad says, and it all goes easier if they give donors a little something.
Fundraisers have better success if they upload a persuasive, clear video clip explaining why the project is necessary and why public support is too. But they shouldn’t overdo it. People need to realize the value of the product and the amount should be realistic, based on the entrepreneur’s real need, Gad says.
For the privilege of using its platform, Headstart charges 9% of the total and Mimouna charges from 9% to 12%, depending on the track the fundraiser chose.
That’s not peanuts but Meiri feels it’s reasonable. “We undertake the risk together with the entrepreneur,” he says. “We work and invest a great deal of effort in all of them, we have a team that supports everyone, we help bring people to support the project, and I think it’s worth much more than 9%.”
Half a year ago the crowdfunding industry received a boost when the Israel Securities Authority approved regulations enabling companies to raise money through internet from an unlimited number of investors, without need to publish a prospectus first.
The idea was to help small to medium companies tap non-bank sources, explains Tsofnat Mazar of the ISA.
Mazar does beg to point out that crowdfunding is riskier than investing in publicly-listed companies though, because companies that issue shares or bonds through the stock exchange have duties of disclosure, while nobody’s supervising the companies that tap the public through the internet.
One problem for small companies was that raising money through the stock exchange was costly for them, including because of the need for quarterly reports and more. For them the crowdfunding option is a revolution, Mazar says.
Before, any company wanting to raise money from the general public had to publish a prospectus, which would elaborate on the company’s financial condition, to enable people to reached informed decisions. The companies also had to file routine statements.
Supervision of crowdfunding is pretty low-key: The Israel Securities Authority supervises the platforms. To get ISA approval, the platforms have to have insurance, for instance. And a company seeking funding may not have to publish a prospectus but it does have to disclose its purpose, information on its leaders and more. The platform is held responsible for checking that the information is accurate.
Since crowdfunding deals are high-risk because there’s no prospectus, the ISA decided to cap possible investment by an ordinary person at 10,000 shekels per venture per year, and no more than 20,000 shekels in all projects in a given platform during a given year. Success pays twice: An investor who earned more than 350,000 shekels in a year can invest up to 100,000 shekels a year.
As for the companies hoping for money, they can raise up to 4 million shekels a year from investors on a given crowdfunding platform.
There are two circumstances in which a company can raise an additional 1 million shekels a year. In the first, a leading investor with relevant experience can cover at least 10% of the amount, signaling to the public that the company has passed the test of a professional. In the second, a regulator — the Chief Scientist’s Office, the Small Business Authority or the Israel Innovation Authority — may approve raising the additional amount money after confirming that they have examined the company and deemed the product not unfeasible.
The regulations stipulate that during the lifetime of any company that raises capital from the investors, it must provide information — like that provided by a private company — to the Registrar of Companies. That is because, under the regulations, the company remains privately owned even after it raises capital: it has no obligation to appoint external directors or to gain approval for insider transactions.
A company raising funds on a crowdfunding platform must go the all-or-nothing route, meaning it only receives the money if the entire funding target is reached by the deadline. For the duration of the project, the investors’ funds are held by trust companies.
One Israeli crowdfunding platform for startups that earned regulatory approval is PipelBiz, which was established three years ago. It all began with a restaurant, says CEO and co-founder Oren Bennun.
“We had a restaurant but needed cash, like any small business. We sought a way to raise it.” When one can’t bring money from home, the only solution is to bring more partners into the business. Then they start to fight.
“We wanted a new business model, where there are one or two partners who make the decisions, and others who put initial capital and have an interest in it, but are not partners. Then we came up with the idea of raising money from the masses in exchange for shares.”
They thought they’d invented the wheel, Bennun says; then they discovered that crowdfunding was a thing rolling over billions around the world. In Britain, bars and hairdressers get their start from crowdfunding, he says.
Bennun and his friends abandoned the restaurant business, and by raising 7 million shekels from the masses in January 2015, they established PipelBiz.
He feels the ISA’s decision to enter the field will be helpful. “The law protects investors,” he says. “The Israel Securities Authority imposed constraints on investments in order to protect investors, and obliges us, as coordinators of the proposal, to examine the companies and behave transparently.”
Can somebody raise money, take it and run? Well, Headstart’s Meiri points out that nothing in the world of investments is entirely safe, but it isn’t really possible for a crowdfunded entrepreneur to up and run. The platform asks who stands behind the company, what it does and what stage it’s at; there are agreements, he points out.
When a product is still very raw, that’s when crowdfunding is appropriate, suggests Yossi Yarkoni, whose Robin Hood pro company developed a retirement portfolio management app. It raised capital on PipelBiz. When a company’s not ready to roll just yet, crowdfunding can bring money without new partners who demand explanations; who don’t get a seat on the board of directors — but who do get reports on a quarterly basis.
Want to enjoy 'Zen' reading - with no ads and just the article? Subscribe todaySubscribe now