Financing hurdles have always been termed as the key hindrance to growth for many start-ups in Africa and more specifically in Kenya. Traditional financing options for businesses lack the flexibility needed in dealing with start-ups; hence creating a need for alternative funding options. One such funding strategy that is slowly gaining popularity in the Sub-Saharan Africa is crowdfunding; an online platform where individuals contribute towards funding a common project.
Commercial banks consider start-ups to be too risky to lend to; while venture capitalists lack clear exit strategies after investing in them. Moreover, the required rate of return (RRR) by most venture capitalists from their investments cannot be achieved by most start-ups in the short-run. Micro-Finance Institutions (MFIs) on the other hand are very selective on the ventures they lend to; and their interest rates are very high hence locking out even more start-ups from funding.
Faced with such a huge challenge in sourcing for funding for expansion and growth, start-ups therefore need to venture into other alternative ways of raising capital. Crowdfunding comes in handy as a means to the end in securing the much needed capital by small businesses. The model is very simple and drawn from the Harambee spirit that is common to all Kenyans. The only difference in this case is that the fund-raising is done on an online platform with potential lenders coming from anywhere around the globe.
The crowdfunding industry
Among the top crowdfunding sites we have in the world are Kickstarter and Indiegogo. Both of them are international brands used mainly to raise money through donations towards art, businesses, and innovations among ventures.
Coming closer home, we have Kiva which has proved very successful in helping small businesses raise money for diverse business projects across Africa. According to data from their site, they have lent out about $690 million since their inception in 2006. The site has about 2.1 million users; 1.2 million of whom have funded about 1.6 million registered borrowers on the platform. Kiva operates in 86 countries through 297 field partners. The average size of loans lent through Kiva is about US$400 with a repayment rate of 98.75%.
In Kenya, the leading crowdfunding site is Mchanga which was started in 2013. Mchanga utilizes the convenience of mobile money transfer in mobilizing funds, hence giving it an edge in the market. We also have Babandu started in 2014 under the incubation of Nailab and hosted by 1%club site. These are just but pioneers in a sector that has proved successful and which will attract many players in the future.
Crowdfunding websites raised US$89 million in 2010 and the numbers grew to US$5.1 billion in 2013. The industry is projected to grow to US$90-96 billion by 2025; hence providing a viable option for start-ups looking to raise capital using this alternative method.
How crowdfunding works
To raise money through crowdfunding, you need to sign-up with a crowdfunding site online. You should then create your crowdfunding campaign and start raising money from the lenders who are signed up in the site you are using. To create a successful fund-raising campaign, you need to keep in mind a few things.
First you need to have an audience or be able to draw an audience to your campaign on as many online platforms as possible. This is important since you are raising money from the crowd and the bigger your crowd is the higher the chances that you shall succeed in your campaign. That notwithstanding, you need to have a thorough marketing plan in advance. A crowdfunding campaign is all about selling your idea to interested people and convincing them to invest money in it; you therefore need to have the right marketing tools at hand before you venture into it.
Top on your marketing tools list that you need for a successful campaign is a compelling and moving story. Human beings like stories and the better you are in telling the story behind your business idea, the higher your chances of raising more money. The story must have an emotional attachment with the readers and it should be having a social impact for it to attract more attention and create higher chances of attracting funding. Remember to tell how you are solving a problem in the society and be creative at while at it.
You then need to create a short video that summarizes your business idea and tells your story in a very moving way. People like watching interesting videos and the more you make your video interesting; the more it will be shared and the more people you shall be able to reach in your crowdfunding campaign. The length of your video is also a major factor to consider; keep it to a maximum of 3 minutes and end it with a call to action. Video quality should also be high or else your success rate shall be compromised.
Once you have your story in writing and a video to accompany it, you need to get ready to spend hours creating hype around your campaign. Your success rate will mainly depend on your personal effort in publicizing your campaign online and by word of mouth. In the course of reaching out to as many people as you can, you will end up having a “full-time marketing job” for the 3 to 6 months your campaign lasts. Yes it is tiresome reaching out to hundreds of people each day, repeating the same story and responding to numerous and almost similar questions all day; but the end justifies the means!
Crowdfunding pros & cons
Before you venture into crowdfunding, it will be important to understand the good things and the flip sides of the same.
Among the positive things is the profile you create as an entrepreneur online which eventually boosts your reputation and builds a good brand name for your business. In addition, a crowdfunding campaign is a marketing channel for your business and its products as well as getting feedback from diverse sources. The feedback then goes a long way in helping you reorganize your business operations to suit what the potential customers want. Generally, crowdfunding helps you to determine the success rate of your business when you fully venture into it and kick-off your operations.
On the other hand, if your campaign fails, then it drowns with your reputation too and the success of your business idea will be highly hampered. There is a concern too about intellectual property protection for ideas posted on the crowdfunding sites. The website owners have little or no ability to prevent stealing and copying of ideas posted online. Entrepreneurs therefore are advised to copyright their ideas and seek legal patent rights protection on their own before broadcasting their ideas online. Fears of scams also exists with no clear way to follow up when the investors’ money is stolen; as well as donor exhaustion where funds are raised from philanthropies.
However, despite of the challenges that may be in the crowdfunding sector, the growth rate is remarkable and it is expected to remain consistent into the future. It is therefore a high time that start-ups and entrepreneurs with small businesses considered this as an option for raising capital. This will reduce over-reliance on the traditional sources of funds and create another avenue to give life to smart business ideas with high growth potential across Africa.