Crowdfunding continues to grow in popularity in South Africa as an alternative way to raise funds to kick-start a business, however, like most funding instruments it has its pros and cons.
Below is a guide to crowdfunding and the advantages and disadvantages of this fundraising method.
What is crowdfunding?
Crowdfunding enables entrepreneurs to source funds from a group of smaller investors (known as backers) instead of relying on one investor. It’s increasingly being regarded as a solution to the challenges entrepreneurs face raising funds. Studies show that most South African entrepreneurs fail to get funding from formal financial institutions such as banks, venture capital firms or the government. Some of the reasons that have been identified are entrepreneurs finding the application process confusing and failure to meet strict lender requirements.
With crowdfunding many innovative ideas that would otherwise never be implemented, due to a lack of funding, are given the chance to succeed.
Types of crowdfunding for businesses
There are four types of crowdfunding models, equity, rewards-based, donation and P2P lending. The most appropriate options for business owners are rewards-based and equity crowdfunding. The former enables business owners to raise money and in return investors receive discounts or free products and services. With equity crowdfunding private individuals invest in early-stage businesses in exchange for equity.
Crowdfunding platforms in South Africa
Because of the growing popularity of crowdfunding in South Africa, we have seen an increase in the number of crowdfunding platforms that specifically link businesses with investors.
Uprise Africa was the first equity crowdfunding platform in South Africa, launched in 2017. Their goal is to help entrepreneurs bridge the funding gap by allowing everyone to invest in startups, not just professional investors. The platform also serves as a space for small business owners to receive feedback from investors, get help reaching their target market, and test the viability of their offerings.
Launched in the same year, The People’s Fund is a purchase order crowdfunding platform for businesses that have orders with government and corporations and are looking to raise funds to complete an order.
The newest platform on the block is GoGetta which focuses exclusively on African businesses. GoGetta seeks out high-growth businesses looking for funding, creating unique venture capital opportunities for investors.
Below are some of the biggest benefits of raising capital through crowdfunding.
- Is a marketing tool that can attract investors.
- Helps businesses attract media attention.
- Provides an opportunity to test the business concept with feedback and guidance from investors.
- Helps businesses to connect with their target market before launching.
- Does not require collateral.
- Does not burden businesses with debt.
While beneficial for startup businesses, below are the disadvantages of this funding method.
- It can be costly to run an effective crowdfunding campaign.
- A lot of work and time goes into the preparation and pre-launch campaign.
- Might not work for your particular business.