Every entrepreneur will need some form of financial support to get their business off the ground. Fortunately, there are a number of different options when it comes to financing a new business or expanding an existing one, from banks and government funding to alternative funders.
The majority of small businesses in South Africa are not funded by traditional banks, instead, entrepreneurs have to bootstrap their new ventures and fund their businesses using their personal savings, income or sweat equity.
Increasingly, entrepreneurs are turning to alternative funding options like crowdfunding. With crowdfunding entrepreneurs can raise funds through the collective effort of friends, family, customers and/or individual investors.
Crowdfunding is well suited for entrepreneurs as it allows them to raise capital in a way that does not load them with debt or force them to part with equity in the early stages.
This model is gaining traction as a viable option for raising capital in South Africa, largely because of the wide range of benefits it offers such as helping entrepreneurs to reach a wide spectrum of investors and providing market validation, as well as marketing benefits.
While crowdfunding is well entrenched in countries like the US and UK, in South Africa the concept has not entered the mainstream, in particular crowdfunding for a business venture.
The most established platforms in South Africa are Backabuddy, launched in 2007, and Thundafund, started in 2011; both focus on raising funds for charities and individual causes. In 2017 Uprise Africa was introduced as the first equity crowdfunding platform in the country. It allows private individuals to invest in early-stage businesses in exchange for equity.
In the past two years crowdfunding has grown in popularity, largely because of the COVID-19 pandemic in 2020. During the lockdown many businesses found themselves without income and with mounting operational expenses and without access to traditional funding options or COVID-19 relief funding. This coupled with the digital transformation driven by the pandemic, saw interest in crowdfunding soar.
According to an ITWeb report a number of local crowdfunding platforms such as Thundafund, Uprise. Africa and Jumpstarter reported that registrations by local businesses soared during the lockdown.
Crowdfunding platforms such as Feenix, Thundafund, Uprise Africa, Jumpstarter Crowdfunding and BackaBuddy report that they all saw an increase in activity on their platforms since the announcement of the nationwide lockdown. Backabuddy reported a 32% increase in the number of campaign submissions and a 72% increase in individual donations. Equity crowdfunding platform, Uprise Africa, experienced a 200% growth in applications from entrepreneurs interested in raising capital in return for equity, during the lockdown period.
In 2020 DJ and businessman, Nkosinathi Maphumulo, known as DJ Black Coffee, launched various crowdfunding campaigns to raise funding for organisations hard hit by the COVID-19 pandemic, including raising R164,000 for SAveABusiness, which helps small businesses affected by COVID-19 and lockdown regulations.
Read more: 5 Alternative Funding Options For Your New Business
A lot of thought has to go into choosing the right funding option for your business. This will of course vary from business to business. Entrepreneurs will need to consider factors such as taxation, the terms of funding, dilution of ownership, risk versus return and impact on cash flow in the future.
Other considerations that are specific to crowdfunding, that can affect your business, according to Phillip Lewis, Private Equity Portfolio Manager at Raizcorp, are:
Read more: All Your Crowdfunding Questions Answered
Crowdfunding is legal in South Africa but there are no specific laws regulating crowdfunding in the country. Some aspects are however, regulated locally through the Companies Act of 2008 and the Banks Act of 1990.
There are also currently no set requirements for crowdfunding in South Africa. Every crowdfunding platform has its own set of requirements.
The crowdfunding model has evolved into the three areas of financing for businesses, namely donations, peer-to-peer (debt) and equity-based transactions. The most widely used being equity, donation and rewards based.
Donation-based crowdfunding
With donation-based crowdfunding, individuals request small donations from a large number of people. This type of crowdfunding is ideally suited for raising funds for charities or a personal cause such as covering medical expenses or other unexpected financial crises.
Example: Backabuddy
Reward-based crowdfunding
Rewards-based campaigns are commonly used to raise funds for a new startup or an organisation offering a product or service. Donors are offered a reward as an incentive to contribute towards the campaign in the form of free products or services. With this model there is usually no transfer of ownership and contributions are “generally donation or gift-based”.
Equity crowdfunding
Also known as crowd-investing, the equity crowdfunding model works to close the funding gap that exists for small and medium sized businesses (SMEs) in the country. Donations are used to help launch or grow a business in exchange for a percentage ownership in the company.
Example: Uprise Africa
Read more: Full list of Crowdfunding platforms in South Africa
In addition to attracting investors, crowdfunding campaigns have the potential to be a powerful marketing tool and can be used to test products, market uptake and customer engagement.
By incorporating PR strategies, social media and digital marketing in the campaign, businesses can acquire customers and raise their brand awareness during the process.
Entrepreneurs using crowdfunding can also get feedback and analysis on their business, growth and expansion plans, by investors carrying out their own due diligence prior to investing, which can be invaluable in a company’s success
Read more: The Truth About Running a Crowdfunding Campaign in South Africa
Every successful campaign takes three things – time, money and commitment to run your campaign, advises Lisa Young and Sasha Benjamin from Thundafund.
While crowdfunding offers many marketing benefits, as well as brand awareness, it is first and foremost about raising capital. This means the success is measured by reaching your fundraising goals.
Below is a step-by-step guide to get people to invest in your campaign.
Read more: How To Run A Successful Crowdfunding Campaign And Raise The Startup Capital You NEED
Drifter Brewing Company is a craft beer manufacturer based in Cape Town launched by Nicholas Bush in early 2015. The brand, known for pushing boundaries, distributes to over 360 stores in South Africa and exports to Zimbabwe and Namibia.
In 2018 the company launched a crowdfunding campaign to help accelerate expansion and push their craft beer into global markets. They successfully raised R3 million, secured from 129 local investors. Drifter also made history as the first company to raise that amount on the then newly formed crowdfunding platform, Uprise Africa.
As part of the campaign investors had the opportunity to own equity in the business as well as share in the company’s future growth potential.
With the investment the company was able to increase production and shelf life of their brew and to scale up their production capacity in order to turn their existing facility into a world class brewing hub, exporting to the US, Europe and Asia. They also planned to launch a number of Drifter bars that would serve their speciality brew nationwide.
Johannesburg-based Tshepo Mohlala, owner of Tshepo The Jean Maker brand managed to raise funds through a crowdfunding campaign to be able to execute the production of his signature Presidential Slim Fit Jean on The People’s Fund crowdfunding platform.
The Jean Maker brand produces traditional ready-to-wear men’s denim wear that Tshepo Mohlala describes as “clean, simple, sophisticated, practical, functional, young, adventurous, humorous and African”. They also have a women’s range.
The People’s Fund uses a royalty-based model which allows business owners to retain equity. The Fund provides a launchpad for young and innovative businesses and allows individuals, stokvels and corporates to invest assets into budding black-owned companies.
Their current and past campaigns include Just Laundry, a next day laundry delivery service; MySurfer, an affordable internet service provider for students and Stimela Brewing Co, a Gauteng-based brewery.
Read more: This Crowdfunding Platform Wants to Help Black Businesses
Gannet Pro Drones raised more than R1,4million in an Indiegogo crowdfunding campaign, this after releasing a range of waterproof consumer drones. The startup’s technology is used for fishing and search and rescue.
According to Ventureburn, the startup reached their funding goal within an hour of the launch from 82 backers.
As part of their reward, backers received the Gannet drone at a discounted sales price, as result “the startup is able to secure upfront payment which allows it to order bulk components”.
According to a company spokesperson, the company ran the campaign on Indiegogo as a marketing exercise to maximise exposure for its new Gannet Pro drones.
Founded in 2016 by Jacques Venter, Gannet is the maker of the popular Gannet Drone Release Systems, and currently serves over 7,000 clients around the world.
Gannet Pro drones are fully waterproof and allow anglers to drop bait or life-saving devices several hundred yards out in a matter of seconds.