Crowdfunding emerging as financing source for African entrepreneurs

Finbarr Toesland

It is 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 medium enterprises (SMEs) from scaling and reaching the next level.

“The funding gap for SMEs keeps growing,” explains Ms Shakila Kerre, programme manager, Innovation, at Financial Sector Deepening Africa (FSD Africa), an organisation with a mandate to transform financial markets across sub-Saharan Africa.

“This gap is estimated at US$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 crowd funder 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.

”They cease being thin or no file by digitising 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 US $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 US$2,5 billion by 2025.

Yet, the continent’s underdeveloped but rapidly growing market represents just 0,1 percent of the global market.

Crowdfunding for diverse start-ups

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.

Africa provides an equity-based return. No project, however, that succeeds on crowdfunding platforms in Africa can be considered “typical.”

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.

Thundafund lead, partnerships and customer succes, Ms Mueni Rose Mutiso, said: “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.

“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.”

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.

Challenging ecosystem

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 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 is 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 and credit card.

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 may 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 do not 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.

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. — Africa Renewal