Crowd funding is an innovation in entrepreneurial finance that can fuel risk globally. This new form of capital formation emerged in an organized way in the wake of the 2008 financial crisis largely because of the difficulties faced by entrepreneurs and early-stage enterprises in raising funds.
With traditional banks less willing to lend, entrepreneurs started to look elsewhere for capital. Crowd funding is an internet-enabled way where businesses raise money in a form of either donations or investments from multiple individuals. Crowd funding is still considered currently as a niche phenomenon and rapidly expanding in many countries as seen by many as lapses to fund innovative projects that otherwise would not be carried out.
Models of crowdfunding platforms
Crowd funding mostly takes place on crowd funding platforms (CFPs), example internet-based platforms that link fundraisers to funders with the aim of funding a particular campaign. It is useful to distinguish between donation-based, reward-based and investment-based CFPs. A common feature of all CFPs is that, participants come with the hope to obtain access to additional funding.
Description of the different crowd funding models:
Donation-based crowd funding: Individual or organization offers a tiered series of incentive for donors without expecting monetary compensation. Donors do not acquire any security interest, hence difficulty in raising substantial capital. Donors of small amount may receive only online recognition whereas donors pledging higher amount might be rewarded with a product customization recognition. Examples include: Fundraising Africa and Go Fund Me.
Reward-based Crowd funding: This crowd funding platform allows fundraisers to attract a group of funders who essentially pre-purchase the product, by turning funders into ambassadors for additional rewards. Reward- based CFPs cannot be measured in monetary terms. The most prominent reward-based CFP is kick starter, Indiegogo and Ulule. Funders receive a token gift of appreciation in a form of product/service. No security is acquired, and there is no accountability mechanism.
Royalty-based CFPs: Funder’s acts as investors or lenders who assesses the expected risk investment performance of a successful campaign. Funders receive a share in a unit trust which requires a royalty interest in the intellectual property of the fundraising company. Potential gain is unlimited, however, the rate of gain is pre-determined by the interest rate. These instruments generally attracts small pools of investors than the Crowd funding Investing(CFI) models, entrepreneurs may find it more difficult to raise capital with this model. Examples include: Homestrings, Ecole Chalfai (Tunisia) and Jumpstarter.
Crowd funding investing platforms (CFI)
General standards information for crowd funding investing platforms: (CFI
Information about the business and owners, such as the business plan and their intended use of proceeds.
Type of equity security being offered.
Percentage of the company being sold in the offering.
Amount of time remaining in the offering.
Progress made towards meeting funding target.
Investment can be offered through crowd funding investing platforms in two different ways: equity-based or debt-based.
Equity-based CF platform: Companies using equity based CF platforms use social network to invite investors on campaign pages. Fundraisers offer equity stakes for the funding of a campaign. Examples include: Afineety (Morrocco), Afristart and Wealth Migrate (South Africa). Professional fund managers select a number of projects which are then collected in a fund. Equity holders are subordinate to creditors in the event of bankruptcy, and its securities laws are complex in nature.
Debt-based/ Lending CF Platforms
Funders receive a debt instrument that pays fixed rate of interest and principal returns on a specified schedule. Pre-determined rate of return agreed upon between lender and borrower. Debt holders are seniors to equity holders in case of bankruptcy. In the case of debt-based platforms, disclosures include: the type of debt, the interest rate and the term of the instrument.
Debt platforms facilitate the aggregation of loans for the business, fund transfers to the business and repayment of the loans from the business back to investor. An example for debt/ lending- based CFP include: Funding Circle, Lending Club, Funda Solva (Nigeria) and Cheetah Fund.
CROWD FUNDING OPPORTUNITIES IN THE DEVELOPING COUNTRIES
Merging the social web with the entrepreneurial finance: Crowd Funding investing portal can facilitate the flow of information from early-stage enterprise to potential investors more rapidly than ever been possible.
Crowd funding is efficient for investors.
CF disrupts the funding cycles: Business analyst and venture capitalist traditionally have served as the funders of early stage enterprise in the developing world.
Crowd funding may expand the geographical range of angel investment as well as product validation, support networks and partnerships.
Crowd Funding investment platforms have the potential to provide returns to investors, change societal norms, return capital to a home country, and provide investment opportunities to channel savings as well as generate wealth, innovation, and jobs.
Crowd Funding Investing promises to democratize and expand access to capital by enabling entrepreneurs, small and medium-sized enterprises obtain funds for growth. The need for supportive ecosystems had enabling initiatives and actions, including forward thinking regulations, effective technological solutions and cultures that can adopt to this new investment vehicle.
Key recommendations facilitating the development of a functioning CF ecosystem
A regulatory framework that leverages the transparency, speed and scale-up advances in technology.
Strong social media market penetration and internet usage necessary to harness demographic and technology trends to drive collaboration and cultural shift.
A regulated market place that facilitate capital formation whilst providing prudent investor protections through education and training.
Collaboration with other entrepreneurial events and hubs such as business plan competitions, incubators, accelerators, and co-working spaces to create a funnel for opportunity and prudent oversight.