‘Essentially, crowdfunding is a very African concept, like a technological version of ubuntu. It’s collaborative, interactive fundraising, based on the belief that “together we can succeed”,’ says chairperson of the African Crowdfunding Association (ACfA), an organisation that lobbies for clear and harmonised crowdfunding legislation across the continent.
The concept of crowdfunding is simple but ingenious: A large number of internet users each give small amounts of money to raise finance for a good cause, creative project or business idea.
It starts with an individual or group pitching their campaign on a crowdfunding platform and setting targets: How much money to raise, in what time frame, and what rewards there may be for backers. They market their campaign on social media to attract funders who make up the ‘crowd’ and pay money towards the project. This can be done via credit card, EFT, PayPal and sometimes even cryptocurrencies such as Bitcoin.
Africa’s crowdfunding uptake is growing rapidly. In 2015, the continent hosted 57 crowdfunding platforms that raised more than US$126.9 million, according to Afrikstart. Since then, many new ones have emerged, providing local alternatives to the big global players such as Kickstarter, Indiegogo and GoFundMe. The ACfA recommends using Africa-based platforms, which are listed on the association’s website (africancrowd.org).
It’s your choice
Each platform has a distinct purpose within three overarching categories. Firstly, donations-based crowdfunding lets backers pay towards people or projects in need. South Africa-based GivenGain and BackaBuddy focus on this charitable category, with BackaBuddy raising a total of R68.6 million for 3 970 causes since its inception in 2007. This includes funding high-powered binoculars for shark spotters to improve beach safety, and buying a medical device for a young girl with cerebral palsy. Potential funders can choose from a list of active campaigns, such as saving vervet monkeys in a Phalaborwa rehabilitation centre; paying school fees for 14-year-old Andiswa in Umlazi; or helping the South African martial arts team travel to The World Kungfu Championships in China.
Secondly, rewards-based crowdfunding works on the premise that creatives, innovators or entrepreneurs offer their backers goods or services (‘rewards’) in return for their financial support. Thundafund has, for example, enabled a South African rock band to raise R1 million to produce their album. The tiered rewards for their backers included bragging rights, posters, and a day out with the band. This success story was soon overtaken by Sugarbird Gin, a start-up seeking R750 000 to finance the crafting, marketing and distribution of its floral fynbos gin. The crowdfunding campaign promised backers bottles of gin in exchange for their pledge, and raised more than R1 million on the site. Similar local rewards-based platforms include Jumpstarter, Candystick and StartMe.
But, it’s equity-based crowdfunding that promises the greatest socio-economic impact. ‘It differs fundamentally from donations- and rewards-based crowdfunding because it’s an equity investment where multiple investors buy shares in a company,’ says Vuyisa Qabaka, co-founder and director of Uprise.Africa, the region’s first equity crowdfunding platform that went live in January. He explains that this is neither a collective investment nor an online stock exchange, but falls into the basket of alternative investments, which also includes angel and peer-to-peer investing.
Equity crowdfunding democratises access to capital for entrepreneurs and gives ordinary people the chance to invest in early-stage deals. ‘We’ve already had one extremely successful campaign (Drifter Brewing Company) and one failed campaign (Jacana Media),’ says Qabaka. ‘The Drifter deal attracted 170 private investors who on average invested R10 000 each. The minimum cash investment on our platform is R1 000, and there’s currently no maximum.’
Each campaign is carefully evaluated and taken through a rigorous process of financial and legal due diligence.
How to benefit
‘The internet is no magical money pot,’ says Allen. ‘Running a crowdfunding campaign requires hard work and research. You need to offer your backers honest value and tell a good story in order for it to be successful.’
It’s also a fantastic way to market-test a product. As Forbes magazine says: ‘If your crowdfunding foray only gets a few cents along with some gasping emojis, then maybe, just maybe, your idea can’t hold water.’
So if you’re planning to start – or back – a campaign, do your homework first. For instance, you have to understand the fee structure, because platforms deduct various fees for their services. Some only release the funds if the campaign goal is reached; others pay out funding as it comes in.
Finally, the Financial Sector Conduct Authority (previously the Financial Services Board) has not yet regulated crowdfunding in South Africa. ‘We don’t hide the risks,’ says Qabaka. ‘Investing in start-ups and early-stage businesses always carries risk because many fail, but it can also be extremely rewarding. Our goal is to create a pipeline of high-growth SMEs.’ Which is exactly what Africa needs to spur economic growth.