In this era where innovation is accelerating, the search for non-traditional funding sources has become a pressing need for ambitious startups. While venture capital investment remains a cornerstone in this field, entrepreneurs are seeking broader and more flexible horizons.
According to data from the Wamda platform, startups in the Middle East and North Africa (MENA) region crossed the $4 billion in 2022. Alternative financing accounted for approximately 15% of the total funds raised by startups that year, which is a significant share in the context of investments in general. Crowdfunding platforms saw a 25% increase in funds raised compared to the previous year. In this article, we will explore how these methods can provide you, as a startup founder with the opportunities needed for growth and expansion, and how you can take advantage of these unconventional sources to achieve success.
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Crowdfunding: When the Crowd Becomes a Driving Force for Business
Imagine you have a brilliant idea for a new project, and you ask thousands of people to contribute small amounts to turn that idea into reality. This is the essence of crowdfunding. It is the process of raising money from a large number of individuals, usually online, to fund a project.
Crowdfunding is an ideal platform for ambitious startups, offering them a range of important benefits. Through it, these companies can reach a wide audience of potential supporters, allowing them to build a ready customer base from the early stages. Additionally, startups can test market acceptance of their idea and products before making significant investments, helping reduce potential financial risks. Crowdfunding also helps raise brand awareness by attracting media and investor attention, supporting the company’s exposure and increasing its chances of success in the future.
Types of Crowdfunding: Which One to Choose?
- Donation – Support from the Heart : Do you want to be part of a success story? Donation-based crowdfunding is the simplest form, where you contribute money to a project you like without expecting a material return. Imagine supporting an innovative idea just because you believe in it!
- Lending: A Safe Investment with a Return : If you’re looking for a safe investment with a return, lending-based crowdfunding is the right option for you. Here, you lend money to the startup and expect the amount to be repaid with a fixed interest rate. It’s like giving a loan to a friend, but on a larger scale.
- Equity: Be a Partner in Success : If you want to be part of the startup and benefit from its growth, equity-based crowdfunding is the ideal choice. Here, you purchase shares in the company, making you a partner in the project. If the company succeeds, you profit through the increased value of your shares.
How to Benefit from Crowdfunding?
- Define your goal: How much money do you need? And what will you use the funds for?
- Choose the right platform: There are many crowdfunding platforms, each with its own features and target audience.
- Design a strong campaign: Create an attractive campaign page that tells your story and explains why people should support you.
- Engage with your audience: Interact with potential supporters, answer their questions, and share regular updates.
One of the most prominent examples of crowdfunding success is Oculus VR. This company started as a small project on Kickstarter, where it managed to raise over $2.4 million from tens of thousands of supporters. This huge success attracted the attention of tech giant Facebook, which acquired the company for 2 billion USD.
One platform we’re especially excited to support is KiwiCollect, the first-ever crowdfunding platform in morocco, which recently secured approval from “Bank Al Maghreb“. Founded by a passionate Moroccan entrepreneur and her partner, KiwiCollect is set to revolutionize the crowdfunding landscape in the country and maybe the region. By offering a local solution for innovative projects to raise funds, this platform provides a much-needed boost for Moroccan startups, allowing them to turn their ideas into reality with the support of their own community. You can join their waiting list now to stay updated and be among the first to know about their official launch. Hopefully, this will pave the way for more Moroccan-born platforms and initiatives to flourish on a regional and global scale!
Crowdfunding Challenges
Despite the many benefits crowdfunding offers, it also comes with challenges that startups should be aware of. One of the key challenges is protecting intellectual property, as companies may find it difficult to safeguard their ideas and projects from being copied or stolen during the crowdfunding stages. Additionally, crowdfunding requires a commitment to delivering the product or service on time, which can place significant pressure on the team to meet deadlines. Moreover, managing a successful crowdfunding campaign involves substantial logistical costs, including marketing and administrative efforts, which require significant resources and time to achieve the desired success.
Crowdfunding is a powerful tool for building startups, offering a variety of options that suit your goals and budget. However, it requires careful planning and effective risk management. By understanding its advantages and challenges, you can make the most of this innovative financing model. If you’re looking for funding for your project in the Arab region, we recommend checking out platforms like Zoomaal, which allows entrepreneurs and innovators in the MENA region to raise funds for their projects through public contributions, and Maddad, which provides opportunities for fundraising and financial support for initiatives and projects aimed at creating a positive social impact. These platforms offer a variety of tools and services that can help you achieve your goals.
Revenue-Based Financing: A Partnership in Success
After exploring crowdfunding, let’s talk about another interesting model: revenue-based financing. Imagine buying a piece of cake, and as the cake grows, your slice gets bigger. That’s exactly what revenue-based financing means! Instead of selling a portion of your company or taking out a large loan, you can get funding in exchange for a small percentage of your future revenues. In other words, investors bet on your success— the more profits you generate, the more they earn.
Why Is It Attractive?
- Flexibility: You don’t need to provide tangible guarantees, and the value of the funding is based on your company’s revenues.
- Focus on Growth: This type of financing encourages companies to grow and expand since the return on investment is directly tied to revenue.
- True Partnership: Investors feel like partners in the project’s success, enhancing trust and cooperation.
How Does It Work?
Simply put, your company receives a lump sum of money upfront, and you commit to paying back a certain percentage of your monthly revenues until the full amount is repaid, plus a profit for the investor. For example, Clearco (formerly Clearbanc) is a leader in revenue-based financing, offering funding to startups in e-commerce and technology sectors.
The advantages of revenue-based financing lie in providing innovative and flexible solutions for startups without having to give up ownership. For instance, instead of selling shares in your company to expand, you can borrow money and pay it back as a percentage of your future revenues, allowing you to retain full ownership of your company. This type of financing also offers significant payment flexibility, where you pay a certain percentage of revenues instead of a fixed amount. If your business thrives, you can pay more, and if you face challenges, you can reduce the payments. Additionally, revenue-based financing is quick, allowing you to access the necessary funds for growth and expansion faster than traditional loans.
Disadvantages of Revenue-Based Financing
However, there are some challenges to consider. Although this type of financing may be more expensive than other options, it offers specific advantages that offset the additional cost. Think of it like buying a luxury product—it may be more expensive, but its quality and features are better. Nevertheless, this financing could put pressure on your budget if your company grows rapidly, as you will need to pay a larger amount from your expected revenues, which could affect your financial resources. Also, not all companies can benefit from this type of financing; if your company is still in its early stages and doesn’t have steady revenues, it may be difficult to obtain revenue-based financing, similar to how it is difficult for those without a stable job to get a loan based on future income.
Revenue-based financing is an attractive option for ambitious startups looking for sustainable growth. It’s a model that aligns investor interests with those of the company, creating a strong partnership that supports growth and success. However, it’s not a magic solution to all problems. Before deciding to use it, you should carefully weigh its pros and cons and determine if it suits your company’s needs.
Incubators and Accelerators: Warm Homes for Startups
Imagine you have a great idea for a new business but don’t know where to start. This is where incubators and accelerators come into play, acting as warm homes that help startups grow and develop. The difference between them lies in the type of support and training they offer.
An incubator provides a comfortable and supportive environment, like a home, where startups receive everything they need in their early stages. This includes offering workspace, and advice from experts to help them take steady steps. The incubator’s goal is to provide the necessary support for the company to establish itself and begin sustainable growth.
On the other hand, an accelerator is an intense training program, like a boot camp, that gives startups a powerful push through funding and specialized mentorship from industry experts. The goal of the accelerator is to prepare startups to jump to the next level quickly, focusing on accelerating their growth and developing strategies rapidly and effectively.
In general, while an incubator provides long-term, continuous support, an accelerator focuses on intensive, concentrated resources to achieve fast progress within a short time frame. In some cases, an incubator or accelerator may take a small share in the startup as part of the investment deal, providing additional funding and fostering a long-term relationship between the two parties.
Success Story: How Careem Grew from a Simple Idea to a Transportation Empire
Do you remember the days of long waits for cars on the street? Before the advent of smartphone apps, booking a car was a tedious and frustrating task. This is where Careem came in to change everything. The story began in Dubai, where Careem started as a simple idea to make car booking easier. With support from the SeedStartup program, Careem quickly grew and expanded its operations to cover many Arab countries. The company reached a value of $1 billion before being acquired by Uber for 3.1 billion USD.
In our region, several successful accelerators have proven their effectiveness in supporting startups. Some of the most prominent include:
- Flat6Labs: Operating in several Arab countries, it follows an investment model similar to Y Combinator in the United States, where the accelerator takes a small equity stake (usually 10 to 15%) in exchange for the support it provides. Flat6Labs offers strategic mentorship, access to its investor network, and funding, allowing startups to grow quickly thanks to this well-organized ecosystem and available resources.
- 500 Startups MENA: One of the renowned names in the field of business accelerators in our region, offering comprehensive support for startups across the Middle East and North Africa.
- AstroLabs: Based in Dubai, it is known for its strong support of startups in the tech sector, providing a stimulating environment for development and innovation in this field.
Why Join an Incubator or Accelerator?
Imagine you are building a new house. Would you prefer to do it alone, or would you want a team of engineers and workers to help you? Incubators and accelerators are like that team; they help startups grow and develop.
These programs offer a range of benefits that enhance a startup’s chances of success. First, they provide you with the opportunity to learn from the best in the field, just as if you were receiving private lessons from an expert mentor helping you become a successful entrepreneur. Second, they allow you to build strong relationships with influential people in the business world, like attending a big party where you meet important and influential guests. These programs also offer funding opportunities, just like having a wealthy friend willing to invest in your idea. In addition, they provide the necessary tools for work, such as fully equipped offices and fast computers, allowing you to focus on developing your business. Finally, accelerators give you a clear roadmap to success, providing you with a guide to achieving your goals effectively.
However, startups that join incubators or accelerators face some challenges. First, the competition is intense; not everyone who applies gets the opportunity to join, requiring a standout application and a strong idea to prove its feasibility. Second, you may need to give up part of your ownership in the company to the investors, which means losing some control over company decisions. Finally, life within an acceleration program can be challenging and fast-paced, with high pressure to achieve results in a short time frame.
Incubators and accelerators are golden opportunities for startups, but they are not suitable for everyone. They can be your gateway to success if you have a great idea. But before deciding to join one, you should carefully consider the advantages and disadvantages and choose the program that best fits your company’s needs.
Angel Investors and Family Offices: Wings for Startups
After discussing the role of incubators and accelerators, we now turn to two other types of investors that play a crucial role in funding startups: angel investors and family offices.
Angel Investor: Your Wealthy Friend with Expertise
Imagine you have a brilliant idea for a new business but need money to start. This is where the angel investor comes in—a successful individual with money and expertise who wants to help young entrepreneurs. Typically, an angel investor is a former entrepreneur or someone who has succeeded in a particular field, providing the startup not only with money but also with experience and networks.
Angels invest in startups for several reasons. First, they are passionate about taking risks and love to support new, innovative ideas with great potential. Second, they want to use their money to help others and create a positive impact by supporting budding ventures. Finally, they benefit from the investment experience by learning a lot from the startups they support, gaining valuable knowledge and experience in the business world.
To clarify, let’s explore some practical examples of angel investor networks operating in the Middle East and North Africa region:
- OQAL: A network of angel investors in Saudi Arabia, founded to provide necessary support to startups and help them grow through financial investments and strategic advice.
- WAIN: A venture capital fund and angel investor community in Saudi Arabia and the Middle East that aims to support startups by providing funding, consultancy, and access to a network of investors to support early-stage projects.
Family Offices: Wealth that Supports Innovation
Family offices are companies that manage the wealth of rich families. These families invest part of their fortunes in startups, not just to make a profit but also to support innovation and the local economy. Family offices often focus on long-term investments, aiming to achieve both financial and social returns.
Family offices invest in startups for various reasons. First, they seek to diversify their investments to avoid risks associated with focusing on just one type of asset, ensuring they don’t put all their eggs in one basket. Second, they are committed to social responsibility and want to contribute to building a better future, reflecting their desire to give back to society. Lastly, family offices want to take part in the technological revolution by investing in innovations and developments, helping them stay ahead of rapid changes in this field.
Let’s look at some examples of family offices in action:
- Al Ghurair Investment مكتب عائلة الغرير – UAE: One of the leading family offices in the region, with investments in industries such as manufacturing, real estate, and retail. The Al Ghurair family is one of the wealthiest in the UAE, managing significant investments both locally and globally.
- Maktoum Family Office مكتب عائلة آل مكتوم – UAE: Represents the investments of Dubai’s ruling Al Maktoum family. It oversees large-scale investments in sectors such as tourism, real estate, and aviation.
- Abdul Latif Jameel Family Office مكتب عائلة عبد اللطيف جميل – Saudi Arabia: One of the most prominent family offices in Saudi Arabia, managing the investments of the Abdul Latif Jameel family, which has a long history in trade and investment. The office is known for its investments in sectors such as automotive, technology, renewable energy, and startups.
Now, Let’s Compare These Two Types of Investors to Highlight Their Similarities and Differences:
| Feature | Family Office | Angel Investor |
|---|---|---|
| Investment Size | Investments can be much larger | Typically smaller investments |
| Stage | Invests at various stages of company growth | Invests in very early stages |
| Motivation | Financial return, social impact, and diversification | Financial return, desire to support entrepreneurs |
| Network | Has a wide network across various fields | Usually has a broad network in the industry |
Why Are Their Investments a Treasure?
Investments from angel investors are a treasure for several reasons. First, these investors provide invaluable expertise, like having a mentor guiding you at every step, increasing your chances of success. Second, angel investors open many doors in the business world for you, like having a magical key that grants access to new opportunities and resources. Lastly, having an investment from a reputable angel investor gives your company a solid reputation, much like earning a degree from a top university, which enhances your credibility and increases trust in your project.
Challenges in Seeking Angel Investment
Startups face several challenges when seeking investment from angel investors. First, the competition is fierce, as many startups are vying for the same investments, making it difficult to stand out and attract investors. Second, the standards are extremely high, requiring your idea to be both strong and innovative to capture the attention of these investors. Finally, negotiations can be tough, as you may need to negotiate complex and challenging terms, requiring strong negotiation skills to ensure the best deal possible.
Angel investors and family offices play a critical role in funding startups, particularly in the early stages. Their expertise and wide networks make them strategic partners for startups. However, entrepreneurs must be prepared to meet their high standards and be able to negotiate fair investment terms.
Grants: The Key to Achieving Positive Change
Imagine you have a great idea for a project that helps people or protects the environment, but you need money to bring it to life. This is where grants come in. A grant is like a financial gift that helps you achieve your goal without having to pay it back.
Grants are extremely important for startups for several reasons. First, grants support innovative ideas by providing the necessary funding to develop new projects that solve social and environmental problems. Second, grants give startups the freedom to focus on innovation and developing new products and services without worrying about repaying loans, enhancing their ability to create. Finally, grants help build a better future by supporting projects that contribute to greater sustainability and fairness in society.
Where Can You Find Grants?
There are many institutions and funds that provide grants to startups in the Arab region, such as:
- Khalifa Fund for Enterprise Development صندوق خليفة لتطوير المشاريع: One of the leading Emirati institutions that provides grants and financial support to startups. The fund offers long-term financing in addition to specialized consultations and guidance.
- Innovative Startups and SMEs Fund (ISSF) صندوق تمويل الابتكار: This fund, which operates in collaboration with the World Bank, offers grants and support to startups in Jordan, supporting innovation and economic growth in the country.
Grants are a golden opportunity for startups seeking to create positive change in the world. If you have an innovative idea and a promising project, don’t hesitate to explore the available grants.
Case Studies: Success Through Alternative Financing Methods
Let’s explore how some startups achieved outstanding success through innovative financing strategies !
Anghami: From Humble Beginnings to Global Success
Anghami, the leading music streaming platform in the Middle East and North Africa, went from self-funding to being listed on NASDAQ. Its financing journey can be summarized as follows: In the beginning, the company relied on self-funding. Then, it raised seed funding from Lebanese angel investors, followed by investments from MBC Group, a media company. After that, it received funding from MEVP and Samena Capital. Finally, Anghami went public on NASDAQ in 2022 through a merger with a Special Purpose Acquisition Company (SPAC).
Nana Direct: Speed and Flexibility
Nana Direct, a grocery delivery app, proved that rapid growth is possible through diversifying funding sources. The company started with self-funding, alongside financial support from family and friends. It later secured revenue-based financing from Clearco. Nana Direct also succeeded in attracting strategic investment from Saudi Arabia’s STC Group. Lastly, it completed traditional funding rounds with regional and global investors. Revenue-based financing allowed the company to grow without having to give up a large portion of its equity at early stages. The strategic investment from STC Group not only provided capital but also valuable logistical and technical support. Additionally, the diversity in funding sources reduced risks and increased the company’s flexibility.
Honorary Loans: Humanitarian Financing
An honorary loan, also known as an interest-free loan or Qard Hasan, is a form of solidarity financing inspired by Islamic principles that encourage mutual assistance. These loans aim to support entrepreneurs and startups in their early stages by providing flexible financing without heavy guarantees and with little to no interest, helping them cover essential startup costs like purchasing equipment, securing initial inventory, and executing marketing campaigns to give them a strong boost toward growth and sustainability.
If you are a young entrepreneur thinking about applying for an honorary loan, it is crucial to understand the core aspects of this type of financing. Here’s what you need to know: Honorary loans focus more on your idea and project than on your current financial standing. So, even if you’re at the beginning of your journey, you can still receive funding if your project shows promise. Of course, there are some conditions to meet, such as age or the type of project, but they are generally less strict than traditional loans. Honorary loans rely on trust rather than guarantees. This means you must commit to your project’s success, not only to achieve your personal goals but also to maintain the trust that has been built with the lender.
Climbing the Success Ladder for Small Businesses
Honorary loans are available to young entrepreneurs through various sources, including chambers of commerce, business incubators, non-governmental organizations, public institutions, and international development agencies. For example, the Moroccan organization Tamwilcom offers honorary loans and funding mechanisms to support micro, small, and medium enterprises in Morocco. It has introduced several measures to encourage access to financing for these enterprises, including products that offer loans without personal guarantees to facilitate the creation and development of small projects. The organization collaborates with several partners, including Moroccan banks, to implement these financing mechanisms as part of national programs like “Intilaka,” a program that aims to facilitate access to credit for micro, small, and medium enterprises, which may include loans with easy terms.
Honorary loans represent a unique model of solidarity financing based on the principle of cooperation and mutual aid among individuals and communities. This type of financing contributes to achieving multiple social and economic objectives, such as empowering vulnerable groups and supporting small projects that face challenges in obtaining traditional financing. It also promotes sustainable development by strengthening social bonds and combating poverty. As an entrepreneur, you know that starting a business can be tough. Honorary loans offer financial flexibility that helps you overcome early challenges. However, you must be prepared to manage your project successfully and repay the loan according to the agreement, as this is the foundation of trust in this relationship.
How to Find the Right Financing for Your Startup
Imagine you are building a ship. Would you rely on only one type of wood to build it? Certainly not! You would choose the best types of wood for each part of the ship. The same applies to financing your startup…
In this article, we have reviewed a wide range of alternative financing sources for startups. Each of these sources offers unique benefits, but they also require a different approach. Alternative financing comes with a set of advantages and disadvantages that must be considered. Among the benefits, alternative financing offers greater flexibility, allowing you to set financing terms that suit your needs and company requirements. It also enables you to retain ownership without having to give up a large portion of your business. Additionally, alternative financing gives you access to valuable expertise from investors and mentors, as well as quick access to funds in some cases.
However, alternative financing comes with some downsides. Some options may be more expensive compared to traditional financing methods, and it may not provide you with the large sums needed to achieve your goals. Failure in some cases of alternative financing can negatively impact your reputation, exposing you to risks related to trust and credibility. Furthermore, alternative financing may require managing relationships with multiple investors, adding administrative complexities. Lastly, some options may impose limitations on your future growth, potentially affecting your plans for expansion and development.
Golden Tips
The world of startup financing is rapidly evolving, and more alternative funding sources are expected to emerge in the future. It’s also expected that investors will increasingly focus on sustainability and social impact. Here are some golden tips that could be useful for entrepreneurs:
- Diversify your funding sources: Don’t rely on just one source. Instead, seek a variety of sources to minimize risk and increase your chances of success.
- Research all available options: Before making any decisions, conduct thorough research on all available financing options and compare them carefully to determine which best suits your needs.
- Build relationships with investors and mentors: Good relationships are key to success. Strong connections can open new doors and provide valuable opportunities.
- Be prepared to pitch your idea: Practice answering investors’ questions and prepare a compelling pitch to improve your chances of securing financing.
- Stay flexible and adaptable: Be ready to adjust to the continuous changes in the business world. Adaptability is crucial for success and sustainability.
Discover the State of Funding in MENA – 2019 to 2023 : The white paper of this month is taking you through the ups and downs of MENA’s startup funding over the last 5 years. If you’re a startup founder, an investor or an ecosystem builder, this is your chance to learn from the past, spot the trends, and write your own success story.
Don’t miss out on knowing the history that could shape our future!
