Crowdfunding is emerging as the most affordable source of capital especially for startups in Africa viewed as high risk by creditors who opt to offer credit services to established business entities.
This new method of capital formation which is already established in the first world enables an individual or organization to solicit fund from willing donors or investors on platforms that leverages the power of technology
Social media is mostly used to market the idea, raise funds, and hold entrepreneurs accountable.
The crowdsourcing platforms: Kickstarter and Indiegogo which sprung up in developed world between 2008-2009 to provide alternative funding options for startups that were receiving cold reception from creditors due to their high risk potential have bailed out many startups across the world.
Kickstarter for instance has successfully helped 57,121 projects to take off. Kenyan startup Ushahidi successfully fundraise 0ver $170000 for its BRCK project, a backup generator for the internet.
Currently there are more than 3800 crowd sourcing platforms in the world with most of them based in the west but Kickstarter and Indiegogo still dominate the market.
The Masssolution crowdfunding 2014 report shows that the two hold more than 50 per cent share of the market which is estimated at $16.2b and expected to reach $34.4b at the end of this year.
Kenya launched its first mobile phone based crowdfunding platform in October 2012.
M-Changa which allows users to initiate fundraising campaigns and send customized fundraising campaign messages via mobile phone to potential contributors allow startups to post their projects for 14 days via mobile phone and period selected by the user online.
To sign up for the mobile phone option, the user has to send a blank SMS to 22231 either on Safaricom or Airtel networks for free.
The user has to insert all identification details before being offered free 250 messages to pitch the idea to proffered contacts.
Extra messages above the 250 limit is charged Sh2. The user can withdraw his donations once they are at least Sh250 and above.
For every mobile phone withdrawal, M-Changa deducts 4.25 per cent plus normal withdrawal charges by M-Pesa or Airtel money. Users can also get and withdraw donations from their foreign donors via Paypal.
M-Changa charges a commission of 4.25 per cent plus normal Electronic Finance Transfer (EFT) transaction charges. The same charges apply for online users.
Dubbed ‘digital harambee’, It has since conducted over 2000 fundraising campaigns with at least 13,000 supporters and close to 50,000 customer interactions since its launch in October 2012, this according to Kyai Mullei, Co-founder M-Changa.
The platform has evolved from purely SMS product to hybrid one that allows online fundraising. It has also incorporated credit card payment mode to supplement the initial M-Pesa option.
According to Mullei, approximately $500000 has been raised on M-Changa which has 16 per cent revenue growth monthly and 56 per cent month on month growth in campaigns started.
In May 2014, Nailab, a tech incubator in Nairobi launched another crowdfunding platform Babandu to help startups to access cheap non equity capital.
The platform which proved its worth by raising Sh125,000 and 20 projects within 24 hours of its launch allows startups to post their projects on the site for 100 days.
Those that meet their targets within this period are charged 7 per cent of the total money raised while unsuccessful ones also receive their funds but minus 12 per cent which is deducted as commission.
Other African countries which have local crowdfunding platforms include South Africa which boasts of StartMe, FundFind and the most recent ThundaFund to provide micro financing platforms.
In Nigeria there is StartCrunch while Ghana has SlizeBiz that focuses on angel investments as well as obtaining micro finances through the general population.
According to the 2013 World Bank Report on the potential of crowd funding in developing world, it is estimated that there are up to 344M households in the developing world able to make small crowd fund investments in community businesses.
These households have an income of at least US$10,000 a year, and at least three months of saving can see them deploy up to US$96bn a year by 2025 in crowd funding investments.
The report indicated that most startups from Africa prefer crowdsourcing on foreign platforms since most donors originate from North America and Europe.
While crowd funding is seen as gold spoon for entrepreneurs in the continent, the Word Bank report conducted by Infodev indicates that there is little knowledge about crowdfunding in the continent coupled by low internet penetration.
The World Internet Stat put at a paltry 26.5 per cent in 2014. It explained that crowdfunding is experiencing culture synonymous with any new invention from western countries but will soon grow.
While these platforms aim at helping upcoming social economic entrepreneurs like musicians, film makers and innovators raise funds to grow their ventures, Infodev, is advising startups to analyze commissions, services and demands set by those platforms to ensure suitable results.
It explains that while Kickstarter markets an idea using several social media platforms to reach many potential donors as possible, if the project fails to meet its targets by even a single dollar at a time its crowd-sourcing time expires, the owner of the idea looses all the total funds collected.
If the project meets its target on time, the platform deducts 5 per cent of the total funds as a commission. Indiegogo on the other hand do not do intensive marketing for the idea but remits funds collected to the owner of the idea whether he meets the target on time or not.
It however charge 4 and 9 per cent commission of total funds collected for successful and unsuccessful ideas respectively.
Other conditions startups should check before selecting a platform is whether they are equity or donation based.
Equity ones allows donors to take a stake in the propose idea if it succeeds but donations ones are philanthropic in nature.
Some of the most successful projects of all time on crowdfunding include Pebble, a digital wrist watch startup which collected $20,338,986 on Kickstarter, surpassing its target by 4,067 percent.