Crowdfunding comes to South Africa
South African entrepreneurs, who have been hard pressed to find funding via traditional means such as bank loans, can now take advantage of a new funding mechanism in South Africa – StartMe.co.za.
Access to seed capital continues to be one of the greatest challenges facing South African entrepreneurs, particularly in light of banks keeping a tight control on lending while financial markets are still in turmoil. As a result, more and more budding entrepreneurs are turning to alternative means of funding.
The brainchild of South African entrepreneurs Ben Botes and Lourie Nel, StartMe is the next generation of business investment and is an Internet-based funding portal which allows a number of small investors to network and pool resources to finance projects, businesses and other ventures. Specifically, this involves raising capital by receiving small investments from a large cross-section of people in an Internet community.
Commonly referred to as crowdfunding, the concept has gained international popularity and interest in recent years as everyone, from non-profits and music groups to politicians and artists, look for alternative means of financing for their endeavors.
According to Crowdsourcing.org, the emergence of crowdfunding platforms (CFPs) around the globe is accelerating. By the end of 2012 there are expected to be more than 530 platforms, up 60% since last year. While the United States leads the crowdfunding trend, with 191 CFPs, crowdfunding is also booming in Europe, with 44 CFPs in Britain and more than 100 in existence across the rest of the Eurozone.
Crowdsourcing.org predicts that the amount of money raised by international crowdfunding projects during 2012 will reach $2,8 billion, up 91% since 2011.
“While South Africa has an abundant supply of finance, accessing it can be cumbersome and challenging, particularly for the budding entrepreneur. Coupled to this, angel investment is still a relatively new concept in South Africa, with few high net worth individuals actively investing in new ventures,” says Botes.
The crowdfunding concept – raising small monetary stakes from a large group of investors, particularly through online communities and social networks – derives from “crowdsourcing”, whereby organisations ask the public, usually via the Internet, to do jobs typically done by their employees. The term was first coined by Jeff Howe who wrote a book on it – Crowdsourcing: Why the power of the crowd is driving the future of business.
One of the first Internet sites to utilise the crowdfunding concept was SellaBand, a portal connecting music fans with unsigned artists looking to record albums. Musicians post their profiles and songs and ask the portal’s users to buy shares, at a minimum of $10 per share. As soon as an artist sells 5 000 shares, they can record the album and the proceeds are then split between the artist, SellaBand and the artist’s supporters.
According to Botes, the crowdfunding concept has taken the venture capital market by storm, with TIME Magazine describing it as one part social networking and one part capital accumulation.
“The biggest issue facing entrepreneurs today is funding their ideas to fruition. Approaching banks requires that the entrepreneur follows certain eligibility criteria such as credit worthiness, security etc. This can lead to delays in getting the business off the ground and the potential of losing first-mover advantage. With StartMe the entrepreneur can raise money in just a few months to expand their business or start their business from the crowd,” he says.
“Most investors in crowdfunding efforts are non-wealthy, non-institutional individuals who simply believe in the worth of the entrepreneurial idea of a small business seeking funding,” Botes says. “Many of these investors are entrepreneurs in their own right who are looking to get involved in other entrepreneurial companies to get a return on their investment. Crowdfunding gives people the opportunity to fund a project that they really believe in, without risking their entire savings on it,” he continues.
Coupled to this, most crowdfunding investors will invest in an industry they understand as this enables them to also become more involved in terms of mentoring a business and offering advice and support – not just monetary support.
“People want to become involved in a business that they understand and choose,” says Botes.
According to Lourie Nel, StartMe is an innovative way to fund creative ideas as potential investors can fund ideas according to their pocket.
“Interested investors can access our website and browse through the projects on the site. When they find a project or projects that they are interested in, they can then purchase investment credits from us. These credits are then awarded to the various projects that these investors indicate they want to support. Once the project comes to fruition, the funder is then rewarded in the form of gifts, complimentary products or shares, depending on the value of the investment,” he says.
For South Africa, StartMe provides the opportunity for economic growth. It has long been accepted that employment, and subsequent economic growth, will be created through small, medium and micro enterprises (SMMEs). Given South Africa’s huge unemployment statistics, creating jobs is a national priority. However, in order to create SMMEs you need entrepreneurs. Equally important is that these entrepreneurs need money to get their businesses up and running.
“StartMe is the ideal platform for budding entrepreneurs to find both the capital and the mentors to get their ideas off the ground and their foot into the business world,” says Nel. “Not only will this stimulate growth in the South African economy, but the downstream knock-on effects in terms of job creation are huge.”
This is echoed by Botes who points to South Africa’s global competitiveness.
“For South Africa to be globally competitive we need to build a strong core of entrepreneurs that will drive innovation as it is innovation that drives development and job creation. Poverty can only be eradicated by economic growth and economic growth depends on competitiveness. Creating environments that spur innovation and providing the necessary funding structures to nurture entrepreneurship will result in increased competitiveness,” says Botes.
“Our platform seeks to secure financing for projects in South Africa in a variety of areas, including music, cinema, visual arts, design, fashion, innovation and technology. The landing of our platform in South Africa is part of our strategy to become a regional player in Africa as Africa presents an amazing talent pool and the growth of social networking and electronic commerce have grown significantly over the last few years within the continent,” he concludes.
The emergence of crowdfunding and peer-to-peer finance models are game-changing developments that promise to change the financing landscape forever. Crowdfunding enables entrepreneurs to leverage the power of social media to solicit funds for projects, causes and their own enterprises. Entrepreneurs wanting to take advantage of StartMe simply need to visit the website (www.startme.co.za), fill in the necessary information, create their business plan and begin networking.
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