What does the young African, a university graduate with ingenious ideas, do when faced with a lack of funding to launch his project? This is indeed a major problem that most entrepreneurs on the black continent are often confronted with. A project that is not attractive enough for investment funds, too small for banks, too risky, especially when you are just starting out. This mode of financing is proving to be the driving force behind the development of African businesses.
Crowdfunding is an online, collective and community-based fundraising system. Thanks to the internet and social media, it allows project leaders to raise funds from personal and professional networks. This capital can take the form of a contribution, an equity investment or a debt instrument, offering potential financing solutions in all sectors and at all stages of business development. In fact, crowdfunding has become a practical tool for start-ups to raise funds. It is practiced in various forms.
Different crowdfunding models
There are four types of participatory financing: crowdequity, crowdlending, reward based crowdfunding and donation based crowdfunding
Crowdequity or equity investment: this financing model allows investors to take shares in companies (generally start-ups) thus obtaining the status of shareholder or partner;
Crowdlending or lending: here the borrower uses a web platform to approach a multitude of lenders who provide financing to the extent of their means. The sum borrowed must be repaid within the set timeframe and terms (with or without interest according to the predefined agreements);
Reward based crowdfunding: this type involves donations with in-kind rewards in return. Here the project owner receives voluntary donations through the platform to support the development of their project. No financial return is foreseen but material rewards such as dedications, free samples, mention of the contributor’s name in the credits of a film, etc. are granted to donors. They are proportional to the amounts granted;
Donation-based crowdfunding: which brings together projects of a charitable, general interest or solidarity nature, with small contributions.
The potential of crowdfunding in Africa
Participatory financing aims to be a reference in the development of African businesses where traditional financing methods have shown their limits.
Described as an “electronic savings” by some observers, crowdfunding made it possible to raise an estimated $126.9 million in Africa in 2015, according to a study entitled “Crowdfunding in Africa” conducted by Afrikstart in 2015. This performance represents 0.4% of global fundraising. Moreover, the activity is evolving very rapidly on the continent, with an annual growth rate of 101% in 2015 according to the Massolution report “Crowdfunding industry 2015”.
Indeed, according to the World Bank’s 2013 report “Crowdfunding’s Potential for the Developing World”, crowdfunding could represent a potential of $93 billion per year by 2025 for developing countries.
Furthermore, according to a 2016 study entitled Africa lagging behind in crowdfunding, it is noted that with $30.8 million raised in 2015, South Africa, alone has 21 platforms, and is positioned as the leading African country in crowdfunding, followed by Egypt with $842,000 for 5 platforms and Nigeria with $314,445 for 9 platforms.
Strong specialisation in donations
The same source informs that African participatory financing platforms are highly specialised in donations (21 platforms), equity-based financing (19 platforms) and reward-based financing (13 platforms). Only two platforms offer peer-to-peer lending, or 3.5%.
In total, almost 4,939 projects were launched in Africa in 2015, 67% of which were successfully financed. The development of this financing system is justified by, among other things, the emergence of a middle class on a continental scale, the rapid penetration of internet and mobile technologies on the continent and, above all, by the significant financing needs of African VSEs/SMEs.
The Afrikstart report offers a ranking of African countries that received funding via crowdfunding in 2015 from foreign platforms. Kenya is the largest recipient of crowdfunding in Africa (USD 21.3 million) followed by Rwanda (USD 8.7 million), Uganda (USD 8.4 million) and South Africa (USD 8 million).
Some platforms in Africa
It is true that crowdfunding is still in its infancy in Africa. Indeed, there are about 57 crowdfunding platforms on the continent, an average of 1.05 platforms per country. This figure speaks volumes about the lack of aspiration of African entrepreneurs in this sector. Nevertheless, we suggest some of these platforms that we advise you to explore in the quest for funding for your projects. Of course, without intending to play a publicity game!
Afrikwity: It offers a crowdfunding service that allows you to invest in the capital of startups and SMEs in Africa. The site also offers a complete service around the administrative and legal aspects of your projects.
Fadev: This platform supports entrepreneurs in Africa who apply the values of a social and solidarity economy. Obtaining finance for your business is possible. However, the project must already be well established to be eligible for funding. Otherwise, Fadev supports companies that are already mature and stable in the field
Jamaafundingis a participatory funding site like any others. In addition to money, you can also give your time by participating in on-site volunteering operations available on some projects.
Fiatope: This is a donation-based participatory financing platform dedicated to entrepreneurs’ projects in Africa. Fiatope’s priority areas of action are higher education, medicine, environment, renewable energy, agriculture, technology and culture.
Africancrowd: Its mission is to stimulate the development of the participatory finance industry in Africa. It operates as a self-regulatory body that promotes transparency and good governance in the crowdfunding industry.
The participatory financing model is undoubtedly a lever for the development of entrepreneurship in Africa. However, let’s not be too hasty. Doesn’t this method of financing present risks that must be understood?
Limits of the crowdfunfing
Faced with the lack of financing for businesses by banks, some entrepreneurs are innovating by taking advantage of digital technologies to raise investment from the general public. These “crowdfunding” platforms present several advantages, but also risks that should not be overlooked for the harmonious development of this alternative financing model promoted by young people.
First of all, platforms are selective, projects may be denied access to fundraising. This means that this mode of financing does not depart from the rule of a certain number of eligibility criteria for financing.
Secondly, crowdfunding does not guarantee that the business project will find investors. Furthermore, fundraising requires a significant investment in marketing and communication beforehand. Not forgetting the attempts at fraud and money laundering that could be channelled through digital platforms.
Crowdfunding platforms are the key element of participatory financing. However, it is important to stress that the rules on the function of the platform determine the proper execution of crowdfunding. Indeed, in countries where crowdfunding has experienced sustainable growth, the establishment of specific regulations governing its activities has been a determining factor in the development of the sector and its professionalisation.
Thus, for public policies, this regulatory work must be accompanied by consultations with the players in the crowdfunding sector. In this context, a great deal of awareness-raising work must be carried out by experts in the field, prior to any implementing decree.
Furthermore, faced with the reluctance of traditional financiers, Morocco has appointed the Central Bank to supervise crowdfunding activities in the same way as banks. A campaign to raise awareness among banks is needed to emphasise the complementary nature of crowdfunding. It is therefore essential to include traditional lenders in the crowdfunding activity and to exploit the potential synergies between the two ecosystems.
Crowdfunding is a strategic and complementary investment vehicle, especially for start-ups, which lack credibility with traditional financial institutions. It makes it possible to gather a loyal community around the project owner and to test the market’s desire for the product or service sold. Without doubt, it is the surest development lever for companies and start-ups in Africa.