Crowdfunding platforms also reduce cost barriers for investors

First-year Masters students at the World Bank-supported African Center of Excellence in Energy and Sustainable Development (at the University of Rwanda College of Science and Technology) practice with wind, solar and other models/simulators in the field of renewable energies.

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By: Finbarr Toesland, Kelley Lynch/World Bank

It’s no secret that Africa is a continent of entrepreneurs. Not only does Africa have the highest percentage of entrepreneurs of any continent, but the female entrepreneurship rate is also the highest in the world, according to research by Roland Berger. Although there is a large pool of talented business people, a serious financing gap prevents small and medium-sized enterprises (SMEs) from growing and reaching the next level.

“The financing gap for SMEs continues to grow,” says Shakila Kerre, Program Manager, Innovation, at Financial Sector Deepening Africa (FSD Africa), an organization with a mandate to transform financial markets in sub-Saharan Africa. “This [gap] is estimated at 330 million dollars according to the latest World Bank statistics. The reality is that even as financing needs increase for small businesses, they cannot access capital to fund their operations and growth.

Trying to bridge this funding gap, small businesses, entrepreneurs and individuals are turning to crowdfunding platforms to raise capital. As banks and other financial institutions view funding small businesses as a high-risk proposition, crowdfunding on a peer-to-peer basis can make it easier to get funding and has the added benefit of giving the crowdfunder access to a global market.

“Crowdfunding platforms are attractive to investors, including banks, because they reduce the credit risk of a market segment that was previously perceived to be thin or non-existent (i.e. only data minimal conventional data were available on these companies and individuals) They stop being thin or non-existent by digitizing their economic activities and collecting data from these companies,” adds Ms. Kerre.

According to the Cambridge Center for Alternative Finance (CCAF), in 2016, the African crowdfunding market was worth $182 million. Nigeria, South Africa and Kenya were the top three markets identified in the CCAF report. Forecasts now show that crowdfunding in sub-Saharan Africa could potentially reach $2.5 billion by 2025. Yet the continent’s underdeveloped but rapidly growing market only accounts for 0.1% of the global market.
Crowdfunding for various startups

The practice of fundraising from family and friends for different purposes has a long history across Africa, particularly where formal banking or insurance products have been difficult to access or difficult to access. prohibitive cost. For example, Kenya-based M-Changa bills itself as “Africa’s largest online fundraising platform” and offers services for everything from construction, businesses and weddings to churches. The mobile platform allows users to create fundraisers in as little as two minutes.

Although online crowdfunding on the continent resembles these fundraising traditions in some ways, it does require writing a formal plan for potential funders.

Each of the crowdfunding websites caters to a different type of investor. Cape Town-based Thundafund offers investors rewards based on their contribution, while Uprise.Africa offers equity-based returns. However, no successful project on crowdfunding platforms in Africa can be considered “typical”.

To secure equity funding, different types of companies have used Uprise.Africa, including Drifter Brewing Company, a South African craft beer maker, which raised nearly 3.9 million rand ($175,521) from 235 investors in exchange for a 12% stake.

Examples of recent projects on Thundafund include an automotive engineer, who raised R300 ($17.55) for a toolbox, and a meat distribution company seeking R150,000 ($8,776) to buy tools. refrigerated vehicles and stock. In exchange for funding, people can receive everything from oil changes to meat baskets.

Additionally, many other businesses are also able to attract new interest in their product or service through the attention their fundraising page generates, proving that their concept works. Mueni Rose Mutiso, Head of Partnerships and Client Success at Thundafund, cites the example of the Thrivors Docu-Series which not only raised thousands of dollars on Thundafund, but their success led to more funding from others. donors.

“When you look at the essentials for starting a business, any startup needs proof of concept, funding, and a market. Crowdfunding steps in to alleviate some of these issues,” says Mutiso.

“We review projects asking them why they are raising money, because it should be clear, but start-ups can use crowdfunding as a way to test the viability of their project,” she adds.

For a start-up, crowdfunding offers a unique opportunity to raise funds without the challenges of conventional loan products or other forms of credit which can be expensive and contain rigid conditions. Meanwhile, for the investor, crowdfunding requires small amounts of money, which makes investing accessible to people who would not normally be able to afford the high fundraising minimums of many fundraising products. ‘investment.

difficult ecosystem
Crowdfunding platforms operating in Africa face many of the same hurdles as other crowdfunding businesses around the world, in addition to the challenges of navigating the unique environments of each African nation. Although platforms such as Kickstarter, Indiegogo and GoFundMe have achieved a high level of notoriety in the United States and throughout Europe, there are no such equivalents in Africa.

“Crowdfunding is still new in Africa, and there is still a level of distrust of things online, especially when it comes to financial transactions. Crowdfunding projects need to be well understood to overcome skepticism,” says Ms. Mutiso.
To eliminate customer friction as much as possible in the investment experience, crowdfunding platforms have introduced a range of payment options tailored to the countries in which they operate, including bank transfers, PayPal, credit cards and M-PESA.

Some of the crowdfunding platforms themselves offer advice to creators on how best to promote campaigns and attract investment through one-to-one phone calls, guides, and blog posts.

Yet, in part because of low crowdfunding awareness, some creators may not have a clear idea of ​​how to promote their projects or what steps to take to get funded. “Most of them expect crowdfunding platforms to provide them with the funds and, if not, to provide backers to fund their projects. They end up creating good projects but don’t have the means to promote their campaigns,” explains Ms. Mutiso.

A lack of regulatory clarity also limits the growth of crowdfunding platforms, although work is underway to establish regulatory frameworks that protect customers and promote professionalism. FSD Africa has worked with the African Crowdfunding Association to develop a legal framework to support the regulation of crowdfunding.

“Overall, the crowdfunding market is still very young in Africa with huge untapped potential,” Ms. Mutiso concludes. “At Thundafund, we are always looking for opportunities to expand into other markets and hope that with its growth, many startups will find crowdfunding a funding solution.”

As the sector grows, access to additional investment will likely increase for African businesses, allowing them to broaden their product offerings and include more entrepreneurs in the economy.

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