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 also the female entrepreneurship rate is the highest in the world, according to Roland Berger research. Despite there being a vast pool of talented business people, an acute funding gap is preventing small and mid-size enterprises (SMEs) from scaling and reaching the next level.
“The funding gap for SMEs keeps growing,” explains Shakila Kerre, Programme Manager, Innovation, at Financial Sector Deepening Africa (FSD Africa), an organization with a mandate to transform financial markets across sub-Saharan Africa. “This [gap] is estimated at $330 million as per the World Bank’s latest statistics. The reality is that while financing needs are increasing for small businesses, they cannot access capital to finance their operations and growth.”
Trying to close this funding gap, small businesses, entrepreneurs and individuals are turning to crowdfunding platforms to raise capital. With banks and other financial institutions viewing funding small businesses as a high-risk proposition, crowdfunding on a peer-to-peer basis can make funding easier to obtain, and has the additional advantage of offering the crowdfunder access to a global market.
“Crowdfunding platforms are attractive to investors, including banks, because they de-risk the credit risk of a market segment that was previously perceived as being thin or no file (i.e., minimal conventional data was available on these businesses and individuals). They cease being thin or no file by digitizing their economic activities and collecting data from these businesses,” adds Ms. Kerre.
According to Cambridge Centre for Alternative Finance (CCAF), as of 2016 the African crowdfunding market was worth $182 million. Nigeria, South Africa and Kenya were the three leading 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 represents just 0.1 per cent of the global market.
Crowdfunding for diverse 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 prohibitively expensive. For instance, Kenyan-based M-Changa bills itself “Africa’s largest online fundraising platform” and offers services for everything—from construction, businesses and weddings to churches. The mobile platform enables users to create fundraisers in as little as two minutes.
While online crowdfunding on the continent is in some ways similar to these fundraising traditions, it does require a formal plan to be written up for potential funders.
Each of the crowdfunding websites caters to a different investor type. Cape Town-based Thundafund offers investors rewards based on their contribution while Uprise.Africa provides an equity-based return. No project, however, that succeeds on crowdfunding platforms in Africa can be considered “typical.”
To gain equity funding, different kinds of businesses have used Uprise.Africa, including Drifter Brewing Company, a South African craft beer manufacturer, which raised almost R3.9 million ($175,521) from 235 investors in exchange for a 12 per cent equity stake.
Examples of recent projects on Thundafund include a female automobile engineer, who raised R300 ($17.55) for a toolbox, and a meat distribution business seeking R150,000 ($8,776) to purchase refrigerated vehicles and stock. In return for funding, people can receive everything from oil changes to meat hampers.
In addition, 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, Partnerships and Customer Success Lead at Thundafund, points to the example of the Thrivors Docu-Series that not only raised thousands of dollars on Thundafund, but their success led to more funding from other donors.
“When you look at the essential things in starting a business, any start-up needs proof of concept, funding, and a market. Crowdfunding comes in to mitigate some of these issues,” says Mutiso.
“We vet projects by asking them what they are raising funds for, as that needs to be clear, but start-ups can use crowdfunding as a means to test the viability of their project,” she adds.
For a start-up, crowdfunding offers a unique opportunity to raise money without the challenges of conventional loan products or other forms of credit which can be expensive and contain inflexible terms. Meanwhile, for the investor, crowdfunding requires small amounts of money, making investing accessible to people who would normally be unable to afford the high fund-raising minimums of many investment products.
Crowdfunding platforms operating in Africa face many of the same barriers as other crowdfunding businesses across the world, in addition to challenges that come with navigating the unique environments of each African nation. Although platforms such as Kickstarter, Indiegogo and GoFundMe have achieved a high level of name recognition in the United States and throughout Europe, there are no such equivalents in Africa.
“Crowdfunding is still new in Africa, and there’s still a level of mistrust of things online, especially involving financial transactions. Crowdfunding projects must be well understood to overcome skepticism,” says Ms. Mutiso.
To remove as much customer friction as possible from the investing 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-on-one phone calls, guides and blog posts.
Yet, due partly to the low awareness of crowdfunding, some creators might not have a clear idea of how to promote their projects or the steps they need to take to gain funding. “Most of them expect that crowdfunding platforms are going to provide the funds for them and, if not, provide funders to fund their projects. They end up creating good projects but don’t have the means to promote their campaigns,” Ms. Mutiso says.
A lack of regulatory clarity is also limiting the growth of crowdfunding platforms, although work is being done to establish regulatory frameworks that protect customers and foster professionalism. FSD Africa collaborated with the African Crowdfunding Association to develop a legal framework to support crowdfunding regulations.
“Overall, the crowdfunding market is still very young in Africa with huge untapped potential,” Ms. Mutiso concludes. “We, at Thundafund, are always looking for opportunities to expand to other markets and are hopeful that with its growth, many startups will find crowdfunding a solution to funding.”
As the sector develops, access to additional investments will likely increase for African businesses, enabling them to expand their product offerings, and include more entrepreneurs in the economy.