The power of the crowd

2013-03-10 10:00

The growing popularity of crowdfunding is turning all of us into potential small-scale investors, writes Maya Fisher-French.

Crowdfunding is a growing trend that allows entrepreneurs to connect online with the public for cash to fund their business ideas.

Last year, US crowd-investing platform Kickstarter.com helped 18?000 businesses to raise $320?million (about R2.9?billion) from more than 2.2?million people.

The concept was born out of a need to provide a platform that brings potential investors and budding entrepreneurs together, bypassing banks and investment managers, as well as their exorbitant costs.

Last November, the first South African-based crowdfunding platform was launched and has already helped one entrepreneur get his own community-based newspaper, New Day, off the ground.

Miranda Simrie, the managing director of Crowdinvest.co.za says they have more than

300 registered investors. The problem, however, is finding good-quality businesses.

Of the nearly 100 queries and approximately 20 completed applications they have received, only three made it past their rigorous assessment process.

“We do our due diligence by looking at who is behind the business, what their business profitability is and what the potential return to investors would be.

“Only those proposals that comply are listed on the platform,” explains Simrie.

In the case of the community newspaper, the entrepreneur already had commitments from his community, both to buy the paper and to advertise.

He needed start-up funds to print the paper and was able to raise R5?000 in just five days through the platform.

Investors received a 5% return after a month. Larger projects may offer a shareholding in the business to investors.

Simrie says businesses are given 60 days to reach their targeted investment amount and, if there are not enough funds raised by that stage, the offering is removed.

Investors commit the funds, but the money is not taken from their accounts until the business has reached its targeted amount, which means potential investors are never out of pocket if the capital raising is not successful.

Another company, Dream Mobile, which required capital to develop a phone for the emerging market, failed to reach its target of R500?000 within the 60 days, raising only R40?000. While still a significant amount of money, it was not enough to launch the business and the money was not paid by the potential investors.

Simrie believes that since crowdfunding is a new concept in South Africa, investors are still testing the waters by investing relatively small amounts of money into new concepts, which makes a business plan with a lower investment target a more viable opportunity.

But as crowd investing gains popularity, this is likely to change, as it did in the US.

While South Africans become more familiar with the concept, crowdfunding may be a good starting point for smaller businesses and new projects, as it offers a return through a product or service but no equity stake.

Patrick Schofield, the head of crowdfunding platform Thundafund.com, which will be going live later this month, says crowd investing is particularly beneficial to start-up entrepreneurs and defined projects.

Due to the low-cost nature of crowdfunding, investors can commit as little as R10, yet 100 investors will mean an entrepreneur has raised R1?000 for his or her venture.

Thundafund.com focuses on creative and innovative businesses that also have a strong positive impact in society.

It may be a small coffee shop that is looking to open or a woman who wants to buy a sewing machine to make children’s school uniforms.

Schofield says that, as these are new businesses, they cannot offer investors a stake in them or significant returns, so they offer products or services in return.

A coffee shop owner may offer free coffee to investors up to the value of their investment.

The lady with the sewing machine could offer her sewing services in return.

A budding wedding photographer could offer discounts on photographs of your big day and a playwright can offer backstage passes and discounted, or free, show tickets.

Payment through product or service not only provides an incentive for an investor but it also creates a natural market for the business owner. Schofield says: “Your 200 investors become your market. It is the perfect storm.”

While Crowdinvest puts its business applications through a rigorous vetting process, Schofield says that, for social enterprises, the value of the money raised does not warrant the cost of business analysis.

The idea is that the community that has invested in the business will be watching the entrepreneur to ensure their funds are not squandered. This can often be a bigger motivator than owing the bank money.

Schofield says crowd investing is also a great way to test your concept as it allows you to ask your potential market if they believe they would use it enough to invest in it.

“If you say you have a great idea, then ask the market if they would buy it. If so, ask them to put their money where their mouth is,” he says.

The kickstarter phenomenon

US-based crowdfunding platform Kickstarter has raised millions of dollars for entrepreneurs since its launch in 2008. Recently, the platform enabled Eric Migicovsky, a 26-year-old engineer, and his partners to raise millions of dollars to create Pebble, a watch that communicates wirelessly with iPhones and Android phones via Bluetooth technology.

While studying industrial design in the Netherlands – where he was an avid cyclist – Migicovsky, a Canadian, came up with the idea for a hands-free device for checking email, texts, and making and receiving phone calls.

In April last year, after numerous rejections from venture capitalists, and rapidly running out of cash, Migicovsky and his four partners approached Kickstarter to raise money from individuals online.

Once they launched their campaign, Migicovsky and his partners expected to have to wait a month to find enough individuals willing to commit $115 each to preorder a watch to raise their target.

Within two hours, Pebble had hit its goal of $100?000 (about R900?000). That night, they’d reached $600?000.

Migicovsky went out for a beer to celebrate, went home and went to sleep. When he woke up, Pebble was at $1?million.

Within six days, the project had become the most-funded project in Kickstarter history, raising more than $4.7?million, with 30 days left of the campaign. Within 30 days, Pebble had raised $10.27?million from 68?929 people on Kickstarter. – Financial Times

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