Why Crowdfunding Is Revolutionizing Access To Funding In Africa

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Written by Tom Jackson

 

Crowdfunding is revolutionizing access to funding in Africa by offering businesses a new way to attract investment from people who believe in a concept or product.

South African e-health startup hearX Group is a hit with investors, having raked in millions of dollars through a variety of mechanisms. In spite of having secured traditional equity funding, however, the company last year took the unusual step of crowdfunding one of its projects.

HearX turned to U.S.-based platform Indiegogo, a pioneer in the crowdfunding space, to raise funds for its hearScope product, a smartphone device for testing hearing. It was a huge success, with hearX smashing its fundraising target, raising 178 percent of its $15,000 goal.

“We decided to use a crowdfunding campaign for the launch of our hearScope product last year because crowdfunding platforms are a great means to gain traction and support in the market for a new, innovative, but unknown, product,” CEO Nic Klopper said.

“When launching a new product into the market, to gain traction and credibility, a crowdfunding campaign is the ideal platform to leverage for this purpose. It’s hard launching a new product into the market – without the support of a well-recognized, reputable platform, it becomes even harder to do so.”

Crowdfunding is fast becoming an alternative form of finance for businesses in Africa. Photo - AP - Mary Altaffer
Crowdfunding is fast becoming an alternative form of finance for businesses in Africa. Photo – AP – Mary Altaffer

Marketing may have been at the heart of hearX’s strategy, but the cash itself was also useful. Increasingly, crowdfunding is being seen as a relevant tool for African businesses that have been locked out by traditional financing sources. The likes of Indiegogo and Kickstarter may have initiated the global trend, but African equivalents are slowly getting off the ground.

The major equity crowdfunding player on the continent is Uprise.Africa, launched in South Africa in October of last year. Since then it has funded a host of projects, including one run by craft beer manufacturer the Drifter Brewing Company.

Founder Patrick Schofield says that crowdfunding online has caught on in Africa because the concept itself is not actually new.

“The concept of community funded-causes, projects and businesses has been an age-old format through which people supported and invested in others,” Schofield said.

For example, in Kenya it is common practice for people to collectively give towards an event in someone’s life, such as a birthday, wedding or funeral. Platforms like Uprise.Africa are taking this process online and moving it into the business-funding space. Schofield said it is catching on.

“It is growing in value every day as an alternate funding structure. Internationally crowdfunding has moved from the fringe into the mainstream. It is just a matter of time before the same happens in Africa,” he said.

Further crowdfunding development is inevitable

“As the appropriate structures that are variants of established international platforms are successfully piloted in Africa, there is going to be a significant uptake of the new model,” Schofield said.

“The existing funding institutes will start to incorporate crowdfunding into their portfolios and look towards blended investment structures that will use crowdfunding primarily as de-risking and control dilution mechanisms.”

South Africa is one of the more developed markets on the continent, and its companies among the best funded. Yet crowdfunding is reaching other corners of Africa too, with recent launches of such platforms in countries like Angola and Libya.

In Rwanda, local company M-funding is helping entrepreneurs access finance via equity and donation-based crowdfunding. It has already helped eight projects raise a total of $10,400, with more than 20 other projects also raising funds.

CEO Koko Legrand said the potential of the financing method in Africa as a whole and countries like Rwanda specifically was huge, but that there was still a lot of educating to be done.

“The model of crowdfunding that is known is Africa is based more on social causes,” he said.

“At the beginning it is hard to explain this concept. Because technology has revolutionised the traditional way of implementing what we call crowdfunding in Africa, there is a big challenge of trust.”

However, he believes people will gradually realise the potential of such platforms to ease access to finance in a variety of settings.

“Crowdfunding is a very easy and fast alternative way to access to finance. With Africa’s market growth, the continent will require more and more financial sources in order to support its development,” said Legrand.

“Because of the challenge of credibility of new business model development, many Africans will be obliged to use crowdsources in order to be funded at the early stage.”

So new is the sector that regulation has not caught up yet, with South Africa the only African nation to have introduced any real legislation in the space.

“While the concept is catching on, every country will have the possibility to adapted its regulation,” Legrand said, adding he hopes governments are enlightened enough to see the potential of the sector and not hinder it. Regardless, he thinks the future is bright.

“In the next few years, when crowdfunding is more understand by Africans, and when more people trust in this new financial technology, crowdfunding will be the first alternative form of funding in Africa,” he said.

Tom Jackson is co-founder of Disrupt Africa, a news and research company focused on the African tech startup ecosystem.