Social media was awash with excitement some weeks back with the scandalous amount of money and social equity that popular Nigerian music star, David Adeleke, commonly known as Davido, raised by crowdfunding through his social media handles. In what has proven to be a first for a Nigerian artiste, the music superstar raised over N184,000,000 after posting his bank account details on social media platforms asking for a little show of love in view of his birthday.
What this event may be argued to validate is that a large number of Nigerians are open to crowdfunding to support different interests, from political ambitions to fandom. Crowdfunding becomes simply a process of raising money to finance an initiative, project, company, or cause. And thus, crowdfunding, not only serves to unite the financial contributions of these different individuals but also builds the camaraderie that unites them in a singular purpose and goal. As such, crowdfunding is a viable tool for attracting social commitment and interest in a cause.
In what appears to be a comic comparison of Davido’s funding fiasco with the startup financing scene, some pundits qualify the crowdfunding frenzy as the largest pre-seed funding, raised this year. Interestingly, the utility and power of crowdfunding are spreading its reaches into the African business environment. A 2013 World Bank report on the potential for the developing world that crowdfunding offers, estimated a $96 billion crowdfunding market for developing markets by 2025.
In spite of the large bulk of the funding that African startups have drawn into the continent this year, it is the case that many startups, especially at the early stages of growth, are still unable to capture interest and funding consequently. These startups find their business and startup plans fall through, and hit rock bottom, particularly due to lack of access to growth capital.
Some of the reasons that put them in this delicate predicament come from the various biases and apprehensions that investors and high-net-worth individuals may have towards their business ideas. Few investors in Africa may have patient capital to invest in worthwhile startup initiatives across the continent. Many investors also face challenges with assessing African companies, possibly because of how remote they may be from the African geographical markets. While these ideas may be scalable and novel, they may never become a reality because of these limitations, which even hinder them from going through concept-testing.
Equity crowdfunding for startups
Crowdfunding, according to Jonathan Moed, may be either donation-based, in which donors are not given anything in return for their donations, or rewards-based, where backers are offered some kind of reward in exchange. This could take the forms of equity crowdfunding, in which funders are given a piece of equity in the company as a reward, or debt/lending crowdfunding, where the lenders offer their contributions as a loan to be paid back with interest. The former type of crowdfunding is what has become more common in Africa, with great potential for the growth of the startup ecosystem.
Equity crowdfunding is a process of pitching for investment through an online platform, from investors and the general public. According to Ralcheva and Roosenboom, it is a market for founders to raise money from a close network including family, friends, customers, current shareholders as well as the mass number of investors in return for an equity share in the business. To ensure that the interests of these individuals placing bets in the company are protected, the platform performs due diligence on the startups that it lists on its platform. For one part, the platform helps investors and the general public to eliminate the challenges with due diligence on startups, as this work is done for them. Secondly, the platform helps startups with newer avenues to attract funding and capital to grow.
Equity crowdfunding offers a model that enables greater inclusivity and increased control for startups at the early stage to secure seed funding. In spite of the debates and skepticism that people raise with regards to risks in equity crowdfunding, research shows that the model is a promising venue for financing startups, democratizing demand, and the supply side of investments to contribute to economic growth.
Platforms for equity crowdfunding in Africa
- uprise.africa: Uprise Africa is reckoned as one of the first equity crowdfunding platforms to launch on the continent. They had their first public equity crowdfunding round in South Africa, in 2018, raising a total of R 1.9 million from over 109 investors within the first two weeks of the round launch. The platform is targeted specifically at sophisticated investors who are aware of the risks invovled and take informed decisions. As such, the general public does not participate in the crowdfunding rounds.
- GetEquity: GetEquity launched this year, as a venture portfolio managementn and fundraising platform. Their aim is to enable startup founders to access easily the funding they require for growth and scaling, through more options for funding. Startups get to list themselves on the platform, and the general public can invest in these startups starting from as little as $10. Through their efforts they are raising the bar on the democratization of access to startup financing.
- NaijaFund: NaijaFund is a Nigerian crowdfunding website that is targeted at helping Nigerians to raise money for whatever ventures that they wish to grow. Without a specific focus on startups, NaijaFund is also utilized by non-profits within the country to crowdfund for their social initiatives.
Enabling greater democratization of access to capital
To enable the growth of equity crowdfunding across Africa, Jonathan Moed suggests regulation to help catalyze these interests. This is to enable the sustainability of these models and initiatives, and their attractiveness to investors across Africa. These are some of the things that regulation in Africa, especially with the Startup Bill in discussion in many African countries, should focus on. Early this year, the Morrocan lower House of Parliament, the House of Representatives, passed a bill establishing a legal framework regulating collaborative financing and crowdfunding (Law No. 15-18 bill). It is hoped that this same energy is imbibed across other African countries looking at regulatory frameworks for startups in their countries.
Another hindrance to the growth of the equity crowdfunding model is the need for quality control. It is important for people investing in the startups on these platforms that they can trust the process and the startups that are put on there. With the way in which fraud and ponzi schemes have captured people’s finances, especially in the wake of the pandemic, people are skeptical about how their investments are managed. The due diligence processes for vetting and approval of startups have to be rigorous and thorough.
It is also important that to fast-track the processes for investing, it is made possible that investors can transfer funds electronically through the platform. Almost all the present equity crowdfunding platforms utilize this online payments functionality to make it easy for funds to be transferred without any hassles.