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Crowdfunding emerging in Africa.

Summary: In an environment where businesses find it difficult to raise funds from traditional sources, crowdfunding can be the ideal method to find the additional finance needed. Finbarr Toesland explains why this is a win-win for both parties.

What do one of South Africa's top craft beer manufacturers, an award-winning identity management platform and a gin maker that empowers underprivileged entrepreneurs all have in common? They've raised more than a million rand from crowdfunding.

Crowdfunding can come in different forms, including donations-based, where people provide money to good causes, and rewards-based where members of the public receive goods or other incentives for financially supporting projects.

But equity crowdfunding is set to be an increasingly relevant tool for African businesses to consider when seeking new funding, especially as lending from traditional financial institutions like banks is hard to gain for new entrepreneurs and established companies alike.

"They are receptive to crowd-funding because there's too much red tape in the traditional ways," says Siya Ngcangisa, head of media and PR at crowdfunding platform, Uprise.Africa. "For instance, many start- up business owners and entrepreneurs have decried the difficulty of obtaining loans due to a backlog of applications received by the funding institutions."

These platforms offer options for both sophisticated and casual investors thanks to the ability to fund projects with whatever amount best matches their investment limit. Smaller investors would normally find it impossible to invest in exciting start-ups with global ambitions or established firms that want to raise new capital, without using a conventional investment vehicle. But crowdfunding gives this group easy access to hand-picked firms that have gone through a due diligence process.

More advanced investors gain the benefit of choosing from a pre-assessed collection of businesses, saving the time and resources they may typically spend to undertake an evaluation themselves, as they seek to diversify their investment portfolio.

Businesses, too, can gain from the ease and accessibility of crowdfunding projects. Rather than seeking investment on an individual basis with institutional investors or other financial firms, which often include stringent conditions with their funding, a single pitch can be viewed by hundreds or thousands of potential investees.

"Apart from the mitigated corruption by using a transparent online model," says Emmanuel Luthuli, managing director of LanteOTC, a crowdfunding platform that connects investors with small and medium sized businesses in Africa, "crowdfunding presents an increased and fair chance for a business/startup to obtain the much-needed funding given the wider pool of investors, as compared to a one-on-one approach. While crowdfunding is not ideal for all businesses, in my view the greatest advantage is in brand marketing at the capital-raising process."

Major players

In the relatively nascent African crowdfunding ecosystem, South Africa-based Uprise.Africa has emerged as the leading equity crowdfunding platform. The largest campaign on Uprise.Africa, which provided funding to an identity management service called Intergreatme, saw over R31m ($2.23m) raised by 422 investors to purchase 25% of the firm earlier this year.

Launched in late 2017, Uprise.Africa sells itself as a 'one-stop shop' for investors as the platform charges start-ups and entrepreneurs who use the service a fee of R24,000 ($1,723) for financial and legal due diligence, as well as an internal review and a prospectus filing with the Companies and Intellectual Property Commission (CIPC). This vetting process attempts to ensure that all crowdfunding campaigns are compliant with laws and the business is operating on a stable level.

"Investors will at least get to know who they are funding, they know what the product is about and if it will return the investment. They also get something in return for their investment, such as a profit share. And businesses will be saved from the strain of dealing with red tape and waiting for months for funding, whereas they should be operating and contributing to the economy," says Ngcangisa.

US venture capital company Nexxus Ventures invested in Uprise.Africa last year to enable the crowdfunder to identify high-growth firms and increase the number of businesses that use the firm to raise funding.

On the surface, the process of selecting and investing in a campaign is straightforward but behind the scenes, staff at the crowdfunding platforms need to ensure that the business looking for capital is both the right fit for this type of fundraising and that they will be reasonably able to use the funds acquired to meet their stated business goals.

There is clearly a demand for equity-based crowdfunding services. According to a report by technology website Ventureburn, Uprise.Africa alone is considering more than 150 applications for start-ups and other businesses to fundraise on the platform.

As the crowdfunding industry remains small, establishing accurate figures of its size are difficult with a report by crowdfunder Afrikstart estimating these platforms raised almost $127m in 2015. While this is only a tiny amount when compared to traditional investments, the World Bank predicts the total African crowdfunding market may reach up to $2.5bn by 2025, indicating the strong potential of this burgeoning investment method.

Old ideas, new technology

Although online crowdfunding is only a relatively recent phenomenon in Africa, the underlying idea is long- established in many nations on the continent. "Across Africa, villages, local communities, tribes, clans, families, business groups, and individuals create associations, often referred to as 'self-help groups', in which they aggregate their savings to fund various social and economic causes.

"These self-help groups are called Harambees in Kenya or Tontines in some Western African countries," says Edwige Boum, founder of Afrikstart, a crowdfunding platform that works to fund, train, and mentor entrepreneurs in Africa.

While equity crowdfunding may be a more appropriate fit for larger companies or those firms with major expansion plans, rewards-based crowdfunding provides smaller businesses with more than just access to funding. For example, Proof Wine Bar, an upmarket bar in the South African town of Somerset West, raised almost $15,000 through this method on Thundafund, a crowdfunding platform aimed at creatives and innovators.

In return for around $140, donors received 'The VIP' package, which included a R2,000 bar tab, a 20% discount card and their picture in the VIP section of the bar's Founder's Wall.

The initial financial injection is, of course, extremely valuable in the short-term but including customers in the initial steps of the business being founded can provide invaluable insights into what customers want and create a group of advocates for the company, who are able to generate organic interest and buzz before an official launch.

"It's often hard for African business brands to compete with international brands and even harder for start- ups to break through the cultural consumer barrier. Crowdfunding offers a share to local communities who in turn become ambassadors and this creates a consumer bias which translates to increased revenue for African businesses and start-ups," says Luthuli.

Crowdfunding is yet to make a significant impact on how African businesses receive investment, with tried and tested fundraising methods still dominating the financial ecosystem. However, as the crowdfunding industry matures and there are more examples of successful campaigns that not only reach their fundraising goal but also achieve a solid return on investment, this innovative investment model will compliment traditional forms of investment and change how both start-ups and larger firms are financed across the continent, if used correctly. n

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Publication:African Banker
Geographic Code:6SOUT
Date:Aug 5, 2019
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