A Guide to Crowdfunding in South Africa

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:

• Intellectual property (IP) protection – the possibility of communicating your idea online and ensuring adequate protection will be costly and risks hard to mitigate, this forces the offering to have a well-defined USP (unique selling point) that is difficult to reproduce.
• Limitations on the use of funds – this means that the money raised can only be used for a specific purpose while many platforms have a clause controlling the distribution of funds until certain conditions have been met, such as if the target hasn’t been attained then the transactions will not be processed and no investments or loans or attained.
• Accounting and compliance considerations – due to the fact that the industry is relatively new and it is experiencing large amounts of growth, there are continuously new regulations and rules that are being implemented, which depending on your business type and location may have negative implications of your ability to raise funds.

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.

• A winning campaign pitch in the form of a 1-3 minute video that explains the ‘who, what, where, how and why’ of your campaign.
  Read more: How To Pitch An Idea To Potential Investors

• A solid understanding of your ideal backers or potential investors.
• Project-related rewards for potential crowd investors. In the case of equity crowdfunding, backers invest in early-stage businesses in exchange for equity.
• An active, updated and engaged social media presence such as a Facebook Business Page people can like and a Twitter account.
• A marketing and PR ‘campaign plan’ covering pre-launch, launch, mid-campaign, pre-closure and closure.
  Read more: How to Get Media Coverage for Your Brand as Part of Your Marketing Plan

• A fundraising/marketing savvy campaign team-leader and/or team.
• Thorough research on previous similar successful campaigns.
• Use your network and understand audience.
• Inform your immediate network of your soon-to-be campaign and excite them about backing your campaign upon its launch.
• A set time-limit suitable to your crowdfunding goal and campaign mission.
• A realistic, suitable and defined crowdfunding goal.

Read more: How To Run A Successful Crowdfunding Campaign And Raise The Startup Capital You NEED