CROWDFUNDING GETS YOUR PROJECT GOING
Use the financial power of the masses to pay for your creative idea, help someone in need or launch your business, writes Maya Fisher-French
Since the inception of Thundafund, social entrepreneur Patrick Schofield’s first crowdfunding platform, nearly five years ago, he has been involved in the creation of the charity site BackaBuddy, which has raised R44 million for individuals in need. Last week, Uprise.Africa was launched as a platform for entrepreneurs to raise venture capital via the crowd.
Crowdfunding is effectively a way for an ordinary individual to raise money for their business, creative project or even emergencies, without having to borrow money from a bank. Individuals can use crowdfunding to tap into the power of the masses, who, in turn, invest in or sponsor other people or businesses. In its broadest sense, it can be seen as a replacement for loans, except that the money invested is not necessarily repaid in the normal sense of the word. The “repayment” can be in the form of a product, a share in the business or, in the case of a charitable cause, a feel-good factor.
Globally, the concept of crowdfunding is still relatively new – just seven years ago, it was still in its infancy and raised about $880 million (R12 billion according to today’s exchange rate) in 2010, according to Forbes magazine. Yet reports show that, by 2015, $34 billion was raised through crowdfunding. One of the largest US-based crowdfunding platforms, Kickstarter, has raised $3.2 billion for more than 129 000 projects since its launch in 2009.
When Thundafund was launched nearly five years ago, most people in South Africa were unfamiliar with the concept of crowdfunding, yet Schofield says this has changed significantly over the past two years.
“At the moment, we have 75 live projects compared with 32 last year. Crowdfunding is definitely coming into the mainstream – most people have heard about it, especially in the entrepreneur space,” he says.
The Thundafund model focuses on micro and small businesses that offer a “reward” to investors, which is used to produce the project itself. An example would be the R1 million raised by South African band Fokofpolisiekar to launch its first album. The band reached its tipping point of R500 000 in just nine days and will be releasing its album in October. Their pledge was to play a free show in Cape Town and Gauteng if they reached certain fundraising milestones.
This model was also used to launch Cape Town’s first chocolate cafe, Honest Chocolate, which opened its doors after raising R66 000 through Thundafund. Honest Chocolate investors could invest as little as R30 for a cup of coffee and a bonbon, or up to R160 for 10 coffees. Honest Chocolate is starting another campaign to launch a store in Johannesburg. The genius idea behind this model is that you are able to presell your product, or at least find out if there is a demand for it, before committing your time, energy and money.
However, Schofield says the Thundafund model works best in the creative space – such as raising funds to publish a book or produce a play, an album or concert.
“It is a reflection of what is most accessible in the start-up consumer space. You need a product you can create to sell, and the easiest way to start from scratch is something creative,” he says.
So far, Thundafund has raised R14.6 million for 244 projects – proving that the crowdfunding concept works. However, it has left a gap for entrepreneurial businesses that need substantially more capital and longer development times.
For this reason, Uprise.Africa is being launched as a crowd-based venture capital raising platform. This is for longer-term investors who want to put their money into a business that has already gone through the concept development phase. This is different to Thundafund because it is, in essence, still testing product demand.
As an equity crowdfunding platform, Uprise.Africa requires a minimum application of R500 000 and the maximum is set at R50 million. Rather than goods or services, investors receive an equity stake in the business. This platform allows entrepreneurs to connect online with the public to raise cash to fund their business concept.
Within a week of the landing-page platform going live, Uprise.Africa received 67 applications from entrepreneurs. However Schofield says that, at best, two will actually make it into live campaigns. Entrepreneurs have to undergo a thorough screening process, which requires them to have a proper business plan, concept and realistic outcomes.
“We are facilitators, not gatekeepers, but certain criteria must be met. We expect that only about 5% of applications will become actual campaigns.”
Uprise.Africa has also ensured that there is a high level of understanding that the risks of investing in an unknown entity are high. Every page requires you to confirm that you understand the level of risk you are taking. Investing in start-up businesses is a risky venture – but one that can pay off if the business is successful.
One of the opportunities for entrepreneurs in using Uprise.Africa is that it provides a trusted third party during capital raising for investors and entrepreneurs. For example, you may have a friend who has an amazing business idea; she needs to raise R500 000 and you are happy to contribute R20 000, but you want to know that there are other investors who will ensure that she raises sufficient capital to actually start the business.
If she uses the Uprise.Africa platform, your funds are committed into a trust account until she has reached her target. If she doesn’t reach the target and the business does not move forward, you get your money back. For the entrepreneur who is relying on friends who are promising to back him, the funds have to be committed in the trust account before he launches his business – so he knows that he is not going to be let down at the last minute by his friends when he has already committed his time and money.
Crowd authentication is also a powerful motivator for entrepreneurs.
“When money has been raised through 100 people, there are a lot more people asking questions rather than just one large funder,” says Schofield.
The entrepreneur will feel the pressure of so many people relying on his success. Schofield says a large number of investors also opens up more networks for the entrepreneur. For example, if you have invested in a plumbing business, you are more likely to recommend it to your network as you have a vested interest.
Uprise.Africa also provides a founder’s agreement and management oversight through partnerships with venture capital firms. Most large venture capital funds will only look at ventures that are trying to raise
R10 million or more, however, they have the skills and expertise to oversee a start-up business. For a 5% stake in the business, a venture capital firm will provide an oversight function to ensure that the business is conducted properly and that accurate accounts are being held. This gives the investor peace of mind that the business they have invested in is being run properly.
Although Uprise.Africa is open to business applications, the first capital raising campaigns will only go live in October as the Financial Services Board still needs to ensure that the venture fits within the regulatory environment. The platform will not receive money until the approval is in place.
“It is important to have the correct regulatory framework in place to protect investors,” says Schofield.
Eighteen months ago, the charity crowdfunding site BackaBuddy was launched and has been the most successful crowdfunding platform to date – raising R44 million for various causes. This is a powerful testament to the generosity of South Africans when it comes to their fellow citizens.
Campaigns range from individual needs to general If you have a creative idea and need to raise R5 000 to R500 000
If you need serious capital and are prepared to give away equity
If you want to start a campaign to help someone in need
fundraising activities. For example, BackaBuddy raised R500 000 for victims of the Hout Bay fires and
R2 million for those affected by the Knysna fires. They are currently running a campaign for the medical bills for Emma Murphy, who was savaged by a pit bull, and raised R196 000 in just a few weeks.
Often, these campaigns are started by people who want to help someone in need rather than themselves. For example, Jenny Evans started a campaign when her domestic worker Theodora lost her home and everything she owned in a devastating fire in Masiphumelele township in Cape Town in 2015. Through a campaign on BackaBuddy, the R15 000 needed to buy a plot and rebuild her shack was raised.
A current campaign is for Donovan, who needs to raise money for his medical bills after being diagnosed with cancer. His campaign has raised R369 000 so far.
Astrid Warren, who oversees the application process, says the most effective campaigns are those started by other people.
“It is difficult to ask for help for ourselves, but it is a lot easier to champion the needs of others,” she says.
BackaBuddy has a strong vetting process to ensure that the campaigns are based on a real need. For example, doctors’ letters and hospital bills are required to confirm the authenticity of the request for funding, and the money is paid directly to the medical service provider.
“We have had situations where people get upset because we ask all these questions, but those are usually the ones who just disappear when you ask for proof of the need,” says Warren.
In a situation where funds are required over an extended period, the fund pays out on an as-and-when basis. To date, there have not been any fraudulent campaigns paid out. This credibility is extremely important to the sustainability of charity crowdfunding as people want to know that the money they are donating is actually going to a good cause.
“South Africa is such a dysfunctional society in many regards, but it comes together in a time of need. This is not about one big funder, but hundreds of people coming together who relate to the need and want to make a difference. This makes them part of the community; it is a nation-builder. Philanthropy is not just about a handful of rich families – we have 52 million philanthropists in South Africa,” says Schofield.