Business

Crowdfunding could link diaspora to investment in Caribbean in a big way

Sunday, December 15, 2013    

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MORE than four in five members of the Caribbean diaspora are interested in investing in business back home.

Just 13 per cent do so today, according to a World Bank infoDev report published last week.

"The biggest barrier we found was visibility," explained Qahir Dhanani, author of the report. "The money is out there, but there is a lack of awareness of investment opportunities, including what deals are there, what deals are high quality, and which entrepreneurs are receptive to angel investing."

Matching angel investors with entrepreneurs in the region have up to now been done almost entirely through friends and family with "86 per cent of investors learning about their investment opportunity through this source", according to the report.

"Such matches limit the diaspora to a narrow universe of potential deals," Dhanani wrote.

Closing the gap between expressed interest and realised investment might be difficult given that many of the diaspora members identified bureaucracy and weak legal frameworks in their affiliated countres in the Caribbean as chief concerns.

But the World Bank team reckons that the creation of an online marketplace that connects diaspora investors with opportunities back home could significantly impact development in the region.

"Such an approach would capitalise on the geographically dispersed nature of diaspora populations, the increasing use of the Internet for social networking and investing, and the nascent but growing crowdfunding sector," said the report. "While an online platform could provide diaspora investors with significantly increased visibility of deal flow, it would also enhance access to finance for entrepreneurs and serve as an incentive to rally stakeholders around creating a network among innovation ecosystem participants."

Indeed, a World Bank infoDev study, which was published in October, estimated that there are up to 344 million households in the developing world able to make small crowdfund investments in community businesses.

"These households have an income of at least US$10,000 a year, and at least three months of savings or three months savings in equity holdings", said the October report. "Together, they have the ability to deploy up to US$96 billion a year by 2025 in crowdfunding investments."

China accounted for up to US$50 billion of that potential, but the projection for Latin America and the Caribbean, where 74 per cent of the population uses online social media networking, was placed at US$11 billion.

Following on the creation of an online marketplace, incubators could exchange best practices on profiling and marketing entrepreneurs online, while service providers, such as law firms and training companies, could list themselves on the site to make it easier for entrepreneurs, incubators, and investors to find them.

Dhanani recommends that policymakers should make serious effort in creating a uniform regulatory environment, given that the patchwork of regulations among different countries makes it difficult to unlock the latent demand for regionally focused investments among the diaspora.

But the difficulty in establishing a relationship of trust with entrepreneurs also stood out, primarily due to distance, lack of due diligence channels, and difficulty in manouevring complex local legal processes.

On the other hand, nine out of 10 respondents to the infoDev survey expressed that it was important to meet the entrepreneur in person prior to investing, while almost all accredited investors stated that they would be more willing to invest in a Caribbean start-up if partnering with a reputable co-investor, such as a multilateral financial institution, a reputable fund manager, or another angel investor.

The role of local angels in further enhancing due diligence and minimising unease with investing in an entrepreneur was also noted as a critical factor for increased diaspora investing.

Local angel investors can conduct background checks on the entrepreneurs through informal networks, confirm the physical presence of the company, and continue light-touch monitoring of the company, if needed.

Among the Caribbean diaspora, almost a quarter have investible wealth of more than US$100,000. What's more, 40 per cent of them has invested in a start-up company of some sort around the world — a quarter of which has been in the Caribbean.

But average deal size remains relatively low with 50 per cent investing between US$10,000 and US$100,000 and just 10 per cent investing larger amounts.

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