Considering a crowdfund? Here's what you need to know

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Monet van Deventer and Nkosikho Mbele, (Photo: Facebook/Monet van Deventer)
Monet van Deventer and Nkosikho Mbele, (Photo: Facebook/Monet van Deventer)

Bloemfontein doctor Paulo de Valdoleiros has been the recent beneficiary of a crowdfunding campaign after being dubbed an "angel" for charging patients only what they can afford. Personal assistant Zanele Masule set up a fund for Oupa, an elderly homeless man identified only by his first name, who saved her from a group of would-be attackers using his walking stick. Shell Ultra City petrol attendant Nkosikho Mbele became an overnight celebrity after he paid for customer Monet van Deventer's petrol when she was unable to find her credit card on the 30th of May. His act of kindness led Van Deventer to start a crowdfunding initiative on the Backabuddy platform that raised some R500 000.

But while crowdfunds have become a popular way to honour SA's heroes, they aren't always just feel-good stories. As occurred in the case of Mbele, social media storms have been known to ensue, with critics questioning who manages the funds and why; how much of the money reaches the beneficiaries; and how effective the fundraisers ultimately are. 

So how exactly do crowdfunds work, where does the money go, and how much of it goes to the intended recipients?

According to Kickstarter, data on SA crowdfunding is scarce, but internationally, most campaigns fail to hit their financial targets. Perhaps the best-known crowdfunding initiative, namely Kickstarter, has a success rate of around 37%, or just over 1 in 3 projects. 

Various factors impact the effectiveness of a crowdfunding campaign. The first is planning. According to Zack Miller in 4 Reasons Crowdfunding Campaigns Fail And How To Avoid Them, many of the top crowdfunding projects that make headlines in fact hire well-known marketing and PR agencies to run their campaigns. They spend time and money.

Another factor is early traction. According to Kickstarter the earlier a campaign can start to build momentum, the more likely it is to reach its goals. According to them 79% of projects that raised more than 20% of their goals were successfully funded from the start. It's much easier to launch with a bang than it is to find it later on. A lot of the early marketing should happen before you ever click 'Publish' on your crowdfunding campaign.

We called three SA crowdfunding platforms to find out more about the local landscape. Jumpstarter and Backabuddy replied via phone and Angel Investment Network via email.

What's the business model?

Jumpstarter: We charge a fixed 5% fee of the crowdfunding goal or 3.5% of total crowdfunding. Both come into effect only once the crowdfunding goal is reached.

Backabuddy: We charge a 5% fee on the money raised.

Angel Investment Network: Entrepreneurs can pitch for free on their site, provided that they submit enough information to impress the team. However, the site provides an optional exposure cost, which will help entrepreneurs boost their exposure and make them more accessible to possible investors.

How do you know if the appeal is legitimate?

Jumpstarter: We ensure that appellants download the Mutual Confidentiality and Non-Circumvention Agreement, complete and sign it, and mail it to preproject@jumpstarter.co.za.

Once the email is sent, one of their team members will countersign and email a copy back to the appellant. The appellant would then send a description of the idea they have, the market opportunity they see, and/or the core need/desire they aim to address. They will then use that description to gauge if they can reasonably expect to add value and/or they have or don’t have conflicting interests. If they can add value and if it won’t involve conflicting interests, they would make the statement in a proposed high level service agreement for their involvement.

Once you accept the terms of the service agreement, they'll meet either electronically or in person depending on geographical, technological and financial constraints. Their commitment would normally be that you’d never have to pay for the first hour. If in that first hour you both find there to be sufficient substance to the other to warrant a continued engagement, you'll  proceed with further discussions, decisions and supporting tasks you would agree upon.

Backabuddy: We ensure that a strict vetting process takes place, where appellants have to provide ID documents, bank statements and copies that verify their details. Documents need to match the campaign if it’s a medical campaign, medical documentation from the doctor needs to be brought forth. If it is a project that needs to raise tuition's funds, written reports from the institutions will then be required.

Angel Investments Network: Our approval team reads and analyses every pitch that it submitted - about 3 000 per week worldwide. Pitches that do not contain enough information are rejected. They advise their investors to carefully evaluate each pitch before committing. This is good for their entrepreneurs because it means they can have their pitch in front of investors within 24-48 hours of joining Angel Investment Network, rather than waiting for months to start their crowdfunding campaign.

If people want to contribute, do they send the money directly to the site or to the person who needs the donation?

Jumpstarter: We have a merchant account which people pay directly. Normally the campaign has a time period from 0-60 days. If a donor donates R250 within that 60 days and the campaign is unsuccessful, the donor gets a refund or can choose the credit option. If the donor donated less than R250, they automatically get credit on the site and no refund.

Backabuddy: We have various paying portals on their website, which accommodate the different paying options. Each crowdfunding campaign has a reference number which donors can pay into.

Angel Investments Network: We do not process investments. We are essentially a listing site helping entrepreneurs and investors to connect. In fact, as soon as the first connection has been made between investors and the entrepreneur whose pitch they like, they can take the discussions off their platform. So, investments are made directly to the company pitching.

Does the site get a share from campaigns? 

Jumpstarter: We collect a 7% fee on successful for-profit projects and 3.5% on school projects or not-for-profit projects. An additional processing fee of approximately 1.5% applies.

Backabuddy: We keep 5% of funds raised.

Angel Investments Network: We charge an optional listing fee. We don’t take any commission on investments made. We have hundreds of thousands of pitches live around the world at any one moment; it would be too much work to keep track of all them and chase success fee payments! We want to help as many people with good ideas as possible - this light-touch approach allows us to scale our solution.

How safe is it for donors to put their banking details on the site?

Jumpstarter: It is very safe - we allow for transparency.

Backabuddy: The site is linked to the Nedbank credit banking portal, so we don’t have access to donors' banking details.

Angel Investments Network: Users do not post their banking details on the site. These are shared privately between the entrepreneur and each investor they deal with.

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