It will have been difficult to ignore the exponential growth in crowdfunding over the past five years. In a relatively short period of time the industry has become an established and credible source of funding for small businesses and start-ups globally explains Will Tindall, Co-Founder of Emerging Crowd.
In 2013, more than $6 billion was raised through crowdfunding platforms, and in 2014 an impressive $16.2 billion. When the results for 2015 are released, volumes are expected to more than double again, to reach $34.4 billion and by 2025 it could be as much as $96 billion . The industry has now surpassed venture capital and angel investing in total volumes raised; this is quite a feat considering it was a relatively unheard of concept not so long ago!
Despite this phenomenal international growth, crowdfunding’s potential in sub-Saharan Africa (Africa) has yet to be unlocked. Small and medium-sized enterprises (SMEs) and startups, which account for the vast majority of growth and jobs on the continent, suffer acutely from a lack of access to capital. Meanwhile, China and India are gradually becoming middle class nations — thanks in part to entrepreneurial value creation.
Business growth stages and capital needs
The lack of an angel investing culture or any scaled venture capital offering means the “funding gap” is even more barren across Africa. This is widened further by the lack of entrepreneurial and support networks that exist in the likes of the US and Europe. An adapted crowdfunding model has the potential to address this head-on, but before the panacea can be reached, some sizeable hurdles and misconceptions need to be addressed:
All investment-based crowdfunding must to be strictly regulated and platforms should be required to follow guidelines to ensure that investors are protected and the sector is able to grow.
Often the guiding principles are around the implementation of robust anti-bribery and corruption, anti-money laundering and financial sanctions procedures. This is paramount to prevent an early upset.
To address the increased risks associated with investing in Africa, platforms need to be properly regulated by international regulators who have built specific frameworks for crowdfunding. This also enables platforms to demonstrate that their issuers have adhered to the highest international standards before being marketed to investors.
Overcoming Asymmetric Investor Information
Frontier market investors often assume, sometimes rightly so, that they aren’t always privy to the full set of company facts.
It is vital that platforms undertake deep-dive financial, commercial and legal due diligence on all prospective issuers and that this information is fully disclosed to investors. The “wisdom of the crowd” is often relied upon in developed markets, but with fewer participants and a less efficient exchange of information, platforms need to do the heavy lifting and be able to display high-quality enhanced diligence.
Experienced analysts should be able to perform comprehensive company analysis as expected of companies in developed markets. For crowdfunding to reach a meaningful size, opportunities must to be seen as investments as opposed to punts!
Simple minority investor protections such as pre-emption rights and tag-along rights should be provided as standard across all platforms – without this, investors may miss out on their fair share at an exit and this could lead to a PR disaster.
We all know that start-ups and SMEs are likely to fail more frequently than established companies. There can be many commercial causes for this and savvy investors should be able to consider the risk-return trade-off before committing.
What isn’t considered a fair risk by investors is if a company fails as a result of malfeasance. A platform that wishes to win the trust of its clients and deter fraudulent activity, must be able to demonstrate that it can pursue appropriate and enforceable legal action on behalf of its investors.
A recent USAID study showed that over 24 million Africans abroad use the web to search for investment opportunities in their home country. Crowdfunding has the potential to become a conduit for this and to become truly transformational. To enable this, African platforms need to foster a culture of trust and transparency within their online communities. If this can be achieved, crowdfunding could bridge a significant part of the existing funding gap and African entrepreneurs will be able to build local economic ecosystems and drive prosperity.