This article was first published in the 3rd quarter 2018 edition of Personal Finance magazine
It may have its critics, and it certainly doesn’t work for everyone, but crowdfunding is undeniably a legitimate and effective form of “alternative” financing. Over the years, crowdfunding projects in South Africa have financed the launch of new technologies, helped myriad individuals and organisations, rescued deserving charities, taken athletes and adventurers to places they’d never dreamed possible, and even saved lives.
In most cases, crowdfunding is conducted via a platform that acts as matchmaker between project creators and the crowd, who fund the project within a predetermined time frame. In some cases, no doubt, these projects have given immovable bank managers a few moments of mild regret.
According to some devotees, the most appealing aspect of crowdfunding is the opportunity to raise funds without incurring debt. But that doesn’t mean it’s a free-for-all where normal rules don’t apply and contributors are inspired by little more than enthusiasm and blind faith. Whereas it may be more edgy and engaging than conventional channels, crowdfunding remains a business proposition, with appropriate safeguards and, in some cases, rewards.
There are essentially four types:
Rewards-based, where contributors receive products and incentives other than financial;
Donation-based. This is the “charitable” category, with emotional rather than material rewards;
Lending-based, where investors receive financial returns, perhaps via interest; and
Equity-based, where investors receive shares and dividends.
Internationally, the big players are Kickstarter, which has helped raise over US$2 billion since its launch nine years ago); Indiegogo, the first major crowdfunding platform, with investments in excess of $1 billion; UK-based equity crowdfunding platform Crowdcube, which has so far raised over £400 million; and CircleUp, with $305 million-plus. A host of other, smaller operations – some of them based in South Africa – also rake in formidable sums every year.
Of the 15 best-funded crowdfunding projects globally, all but two are in the blockchain category (specifically, the Etherium and Bitcoin cryptocurrency platforms). Leading the pack was a campaign last year for a decentralised data storage application called Filecoin, which raised a phenomenal $257 million. Another project, for a self-governing blockchain called Tezos, wasn’t far behind with $232 million. In fourth place was a space combat video game called Star Citizen. By early this year, the developer of the game. Chris Roberts had raised an eye-watering $175 million-plus.
In 2013, I witnessed the power of crowdfunding for myself when inventor Palmer Luckey showed up at the annual Consumer Electronics Show in Las Vegas with the latest prototype of his Kickstarter-funded Oculus Rift virtual reality headset. It was still in relatively crude form, but the enthusiastic reaction of the other attendees suggested that its potential for commercial success was huge.
And so it proved to be. Oculus launched its Kickstarter campaign in August 2012 with a modest target of $250 000. Within a day, some 2 750 people had contributed $670 000, and within three days, its coffers had swollen to $1 million. That’s when it started to become really exciting: in 2014, Facebook bought Oculus for $2 billion. Yes, that’s billion.
Sometimes, the goal is so compelling, or in some cases so heartbreaking, that it seems a crowdfunding project cannot fail. Witness the campaign launched on GoFundMe (gofundme.com) after the tragic school shooting on February 14 in Florida. Kicking off just one day after the incident with the intention of providing support for the victims and their families, it raised $2.7 million of its $3 million target in less than three weeks, with contributions from more than 33 000 people.
By the time this article is published, the campaign will probably have achieved its new goal of $5 million.
Eclectic to a fault
Needless to say, most other crowdfunding campaigns are downright modest by comparison. There are about half a dozen significant crowdfunding platforms in South Africa, of which BackaBuddy and Thundafund are the most successful. A report compiled by the University of Cambridge estimated total crowdfunding activity in Africa to reach over R1.7 Billion in 2018. By 2025, this figure is expected to exceed R30 billion.
At the time of writing, BackaBuddy had raised over R60 million for a number of charitable causes, from financing a new bus for the Cape Leopard Trust (targeting R200 000) to international travel, further education, overseas opportunities for a young ballerina, and people – sometimes animals – in need of prohibitively expensive medical care. Thundafund is second in the rankings with a total of R18.6 million raised from 16 016 supporters for 344 projects.
BackaBuddy attracted widespread publicity in March with the launch of a campaign to raise funds for South African triathlete Mhlengi Gwala, who came close to losing a leg when unidentified assailants attacked him with a handsaw. Within 24 hours, outraged and sympathetic people around the world – responding to a plea to “Get Mhlengi back on his bike” – had contributed R600 000. By the time of writing, some 1 650 donors had upped the ante to R745 000 (towards the target of R750 000).
Commented BackaBuddy chief executive Patrick Schofield: “Through their generosity, South Africans once again proved that as a society, we will stand up for those affected by senseless acts of violence.”
BackaBuddy has also seen two medical campaigns generate over R1.25 Million in 2018. Paediatrician registrar and mother of two, Kerryn Neilson, 32, from Midrand, crowdfunded a total of R 1 294 872 towards an experimental chemotheraphy drug to save her life (there were 450 donors). In another successful campaign, three-year-old, Aaron Lipschitz, the only known South African suffering from a rare immune disease called Interleukin-12 Receptor Defect, generated a total of R 1 272 757, with contributions from over 680 donors to fund his bone marrow transplant.
Schofield, occasionally referred to as the “father” of crowdfunding in South Africa, is also co-founder and chief operating officer of an equity crowdfunding platform called Uprise.Africa (uprise.africa), which positions itself as “a better way to invest in SMEs”. According to Uprise.Africa, raising capital via a public equity crowdfunding campaign helps businesses gain market validation and build brand awareness. The platform encourages investors to build a diversified investment portfolio in order to reduce investment risk.
The platform has a simple sign-up process for novice and experienced investors alike. After signing up on the website, you choose the (carefully vetted) business that interests you, upload your Fica documentation, select the amount you want to invest, and transfer the funds.
Your investment is held in a trust account until the campaign is closed. Once the target is achieved, the business receives the funds and you are issued the appropriate number of shares. If the campaign doesn’t work, your funds are returned to you, less bank charges or transaction fees.
Entrepreneurs are given the opportunity to raise anywhere between R500 000 and R50 million for their business needs. Although there is no charge for creating a profile, Uprise.Africa charges entrepreneurs an initial fee of R20 000 (fully refundable on successful capital raise) to be listed on the platform. This covers the legal and financial due diligence requirements as well as a prospectus.
Once the campaign has completed a successful capital raise, the platform deducts an 8% investment fee. This is made up of a 5% capital raising fee for the platform, 2% for management (to ensure legal compliance and judiciary oversight post-raise) and 1% to cover the operational costs of the public funding vehicle.
Other players in the South African crowdfunding ecosystem include JumpstarteR, which has raised over R465 000 for 18 projects ranging from an “adopt a child for Christmas” campaign to funding for a craft beer legal battle; Candystick, which aims to “improve the experience of group gifting in South Africa”; StartMe!, “where entrepreneurs, artists, causes and others who want to raise money can create fundraising projects to tell their story”; and The People’s Fund (thepeople.co.za), which describes itself as a crowdfunding platform for small black-owned businesses “with a certain edge”, explaining that its primary objective is to exploit the buying power of the masses to build the economy one business at a time.
When it comes to rewards and incentives, campaign owners are encouraged to be creative. Strategies could range from branded T-shirts to acknowledgement in a concert programme, from discounted products to “VIP” invitations to launch events. The rock band Fokofpolisiekar, for instance, sold a private concert for a very useful R100 000.
Sugarbird Gin, another Thundafund project, made use of asset financing with their “buy a batch” reward, marking a first for the platform.
Is crowdfunding for you?
Like so many things in life, it depends. It may well be the best option for financing your new invention, your preferred charity or your lifelong dream, but unless your project is a no-brainer in terms of capturing the attention of potential investors, don’t expect it to happen without a lot of preparatory work.
And if you’re on the other side? That’s less complicated, but unless we’re talking about a contribution with little or no expectation of reward, it still requires a fair amount of homework. Not that rewards should be sniffed at: a few years ago, a Boston ice cream parlour launched a Kickstarter campaign to raise funds for expansion. For $200, lucky investors could have a custom ice cream flavour named after them and featured on the menu for a full season.