Introduction of Crowdfunding to South Africa

With the introduction of crowdfunding to South Africa recently through StartMe, which helps entrepreneurs, creative projects and community initiatives to raise money, normally at levels where angel investors and venture capital firms don't get involved in,we can safely assume that the business finance landscape has changed for good.

With banks increasingly hesitant to support these projects especially where there may be no track record of success as proof, have we finally found a way to address this crucial need of money for start-up projects to succeed?


I’ve often said that I suspect that over the average person’s lifetime they will have probably spent about three years untangling headphones. It’s exasperating! When I heard about Flux Headphones that use tiny magnets to keep cords untangled, I was intrigued not just by their ingenuity but by the way the inventor is trying to bring the product to market. It’s called crowdfunding and it's just the thing for inventors in San Jose and the rest of Silicon Valley.

Crowdfunding uses the vastness and the power of the Web for entrepreneurs to solicit donations from people to fund their idea. Other crowdfunding sites for entrepreneurs include Kickstarter and Peerbackers. Crowdfunding is also used to raise money for political causes, to support artists, indie films and for charities. According to Wikipedia, crowdfunding can be used to attract business investors giving small amounts, in exchange for equity in the fledgling business, under a provision in the federal JOBS Act, which was signed into law in April by President Barack Obama.

Matt Scandora, the inventor of Flux Headphones, pitched his idea on the Web site Fundable.com, which features his product and other products and services by entrepreneurs seeking funding. It contains a two-and-a-half minute video on Flux Headphones, notes the amount of money Scandora is hoping to raise -- $45,000 -- the amount raised so far, $5,000 the last time I checked, and the number of days left for people to invest.

Unlike under the federal law, investors in Fundable.com do not get an equity stake in the business; instead they earn “rewards,” which can be redeemed for gifts from the entrepreneur. It could be something as token as a t-shirt or a free version of the product being developed, like the tangle-free headphones.

By the way, Flux Headphones work with several tiny magnets embedded in the main part of the cord before it splits off into the two ear buds. The video shows a runner wrapping the cord around their wrist when not in use and then unwrapping it when they plan to use the headphones. Flux Headphones only work on Apple products, including the iPhone, iPad and iPod.

Fundable only awards money pledged by backers if they meet their fundraising goal, which forces entrepreneurs to set realistic goals for a particular milestone, such as beginning production of the Flux Headphone. It does allow entrepreneurs to keep extra money if donations exceed their stated goals.

Another crowdfunding site called Kickstarter has the same approach as Fundable. Kickstarter’s mission is to fund “projects such as making an album, a book, or a work of art,” according to its Web site. While it is not intended to start a business, a project can include creating a product. It funds projects in a wide number of areas including art, dance, fashion, film, music or technology. It also has a long list of projects it won't fund, including political candidates, pornography, firearms or multi-level or pyramid marketing schemes, just to name a few.

So as South Africa now finally has its own crowdfunding platform, will we see the same level of involvement from the public in contributing to these projects as we have seen elsewhere, or are we as South Africans just not quite at the stage where we are happy to support someone who we have not quote yet met in person?

Crowdfunding as an Alternative Funding Source

Most business owners today all face the problem of securing business finance.  Almost any entrepreneur with a business plan who have done their research know about the pros and cons of venture capitalists and angel investors.  But these two sources of funds are not the solution for most people.  They typically require you to show you have a proven track record of success in your field and have already established a back of target customers to draw from.  What happens if you don't meet these requirements?  How do you fund your project?

Standard Funding Sources

Very few project are able to be funded by venture capitalists and angel investors as start-up companies.  Because of this what normally happens is the entrepreneur will put together a list of his friends and family and ask them for “donations” to the project.  They will spread the word to their friends and business networks and help to get the project off the ground.  But normally the person starting the project is putting in the overwhelming majority of his/her own money to keep the project alive.  They will take out loans, mortgage their homes, max out their credit cards or do anything they can to get the cash they need to keep the project running.

As if it wasn't hard enough to get funding for a start-up businesses project, the recent downturn in the economy and the financial markets have made banks even more cautious when lending money.  If you do not have an established reputation with your bank or lender then there is almost no way they are now going to take a chance on you or your project.

However there is still hope.  History has shown us that when certain avenues of finance are closed, new ones inevitably open up. This is the case with Crowdfunding in it's various incarnations.  It has become an alternative funding source for many eager entrepreneurs to get their project on solid financial ground.

The Alternative Funding Sources

Many new, alternative ways of raising capital have emerged that are able to help people looking for financial backing find the people who have the money to do so.  Some of the more common types of alternative financing are Microfinance, Peer-to-Peer Lending, Crowdfunding and Social Media.

Microfinance

Microfinance was brought about by Nobel Prize winner and founder of the Grameen Bank, Mohammed Yunus.  Microfinancing is a type of banking service that is provided to unemployed or low-income individuals or groups who would otherwise have no other means of gaining financial services. Many of these microfinancing companies have focused their resources in third world countries.

Crowdfunding

This finance model involves getting people to fund your project through websites designed to attract philanthropic investors.  This concept has worked particularly well for musicians and for the theater groups looking to get their plays off the ground.  If you have a musical or theatrical project and need funding to make it a reality then crowdfunding allows you to reach the masses and people who support your project can donate to your cause.

Peer-to-Peer Lending:

Peer to Peer lending occurs directly between individuals or "peers" without the intermediation of a traditional financial institution. Peer-to-Peer lending (also known as person-to-person lending) is for the most part a for-profit activity.  This distinguishes it from charities, philanthropy and crowdfunding which also create connections between donors and recipients of donations but are nonprofit movements.  There are some established Peer-to-Peer websites available such as Prosper and Lending Club.  However this option may not be available to everyone since you still need to meet certain minimum finance and credit requirements. However it is still not as difficult as getting a loan from a traditional bank.  The standards are much easier to meet.