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Updated 08.11.2021

CrowdFunding South Africa

In this article, we take a look at what CrowdFunding is and how it works. Say, for instance, someone needs money for a project but doesn’t acquire the funds at hand. As a result, they can opt to get a large number of people to invest small amounts of money. Hence, allowing them to complete their project.

Crowdfunding South Africa

How CrowdFunding works

Typically, there are three sets of people involved in CrowdFunding. The first would be the person who is proposing the idea that requires the funding. Thereafter, the second set of people support the idea. Last but not least, is the online platform that brings a crowd together to fund the project.

To get started, the person requiring the funds will set up a profile on a CrowdFunding platform. All the details of the project / business model are available on this page including the funding targets. Thereafter, they can pitch their idea on social media to gain some supporters.

Using social networks is a great way of publishing your idea. Not only will it gain attention but it might also find you the investor you’re looking for.

Potential investors, often private individuals, will then invest different amounts of cash, usually in exchange for equity, until the fundraising goal has been reached (for successful campaigns) or otherwise until the time limit is over. 

Types of CrowdFunding

First of all, there are four key types of CrowdFunding – debt, donation, equity and reward.

Debt CrowdFunding / Peer-to-peer lending

Works in a similar way to getting a loan from a bank, however, the money is received from individual investors. In most cases, investors receive their money back with interest. People opt for this option because they receive better interest rates than at traditional banks. One of the downsides to debt CrowdFunding is that if your loan isn’t 100% funded you won’t get any money.

Pros

  • Lower interest rates in comparison to financial institutes
  • Projects get more exposure
  • Flexible repayments

Cons

  • Obligation to repay the loan with interest
  • Credit risk
  • No insurance

Donation CrowdFunding

Donations pour in from people because they believe in a cause. Donors will help raise money for different causes, projects, or events. There are no returns to be paid out from Donation CrowdFunding as this is purely donations.

Pros

  • Excellent way to build PR and credibility
  • Creates awareness
  • No accumulated debt

Cons

  • Constantly provide feedback to donors
  • Admin costs of setting up a CrowdFunding profile

Equity CrowdFunding

Equity-based CrowdFunding is a method of investing in a company that isn’t listed on the stock market. In exchange, investors receive equity ownership / shares in the business. In contrast to Debt CrowdFunding, the business will not have to pay back the investors. If the business does well then share prices increase. However, if the business doesn’t do well then shares drop. Investors receive potential financial returns either in the form of dividends or by later selling the shares

Pros

  • No loan repayments
  • No credit checks required
  • More cash raised from selling shares to more investors
  • Investors may provide valuable advise

Cons

  • Investors might want to make changes, which could be problematic
  • Shareholders need to be kept up to date with everything going on in the business

Reward based CrowdFunding

Rewards-based CrowdFunding is typically used by smaller businesses. The objective is to get people to donate money in return for a reward. These rewards can be in the form of services or products from the business. The target market will usually have an interest already in the business raising funds.

Pros

  • No credit checks required
  • An easy way to raise capital
  • Great exposure
  • You remain in control of your business
  • Perfect for small businesses requiring small amounts of funding

Cons

  • Competitors can steal your ideas online
  • Funds may be forfeited if goal isn’t reached
  • Not a great option for businesses looking for a large amount of money

Risks of CrowdFunding

Crowdfunding Risks

Now that we have a better understanding the CrowdFunding sector and it’s benefits, let’s dive into the risks. Although CrowdFunding is a great, there are some risks involved. These risks are definitely something to look at if you’re considering CrowdFunding.

Whether you’re looking for funding or wanting to invest it’s always important to know what risks are involved. Here are some of the risks to look at from both ends of the spectrum.

CrowdFunding Risks as an investor

Investing money in someone’s project can often make one feel great. Whether it is for a business operation, a fundraiser, or for a project- there’s risk involved.

As an investor, there are so many things one needs to take into consideration. The main focus is to make money, which is the biggest risk.

Investors need to always ensure that the project they invest in is legit. Ask as many questions as possible and take a look at the business plan thoroughly. If you’re uncertain about something always clarify before investing.

Secondly, if you’re investing in a new business you need to be prepared for losses. Most new businesses often fail within the first year. Ensure that you look at all possible outcomes before investing a large amount of money.

Risks as an investor:

  • Losing all invested money
  • Projects not going as planned
  • Loss of equity is business fails
  • Lack of transparency

CrowdFunding risks as a debtor

As a person asking for funding there can be plenty of risks involved. Very often people find CrowdFunding quite challenging. This is mainly because it requires quite a bit of work.

Some risks involved are:

Posting your ideas online is always risky as it opens up avenues to theft. Competitors can easily view your ideas and steal them (unless patented). If, for instance, you’ve created a new app, someone can use your idea and improve it. Furthermore, they can market it better and get more investors.

Secondly, CrowdFunding takes a lot of time and effort without any guarantees. You will have to create presentations, videos and demonstrations which aren’t free. In order to sell your idea, you might have to spend some money. This poses a risk because your ideas might not work. Thus, resulting in a loss of money before even gaining any investors.

Lastly; the possibility of failing is by far the biggest risk. If your idea fails you still need to pay back investors if you chose Debt CrowdFunding. This might not be easy if you already have a failed business. In addition, you will have to deal with bad publicity.

Best CrowdFunding platforms in South Africa

Luckily, South Africa has a bunch of great CrowdFunding platforms available. Furthermore, these platforms have helped thousands of people achieve their goals. Here are some of the best CrowdFunding platforms in South Africa:

Backabuddy

Backabuddy encourages users to create campaigns that will have a positive impact on society. Individuals can create campaigns for donations, business ventures or projects.

In addition to creating campaigns, they also have an additional feature called, ‘champion’ model. Champion model allows users to raise funds on behalf of a charity or person in need. It’s extremely admirable that Backabuddy takes such great initiative to make a difference.

There are no penalties or limits imposed if users do not meet their targets. Moreover, funds received can be carried over from donations. Campaigns can continue for as long as required. If users do not meet their targets they can still receive their funds.

Backabuddy retains a 5% admin fee of all the funds that are raised through their platform. To apply for CrowdFunding, visit the website at www.backabuddy.co.za/. Fill out the form and create a campaign which can then be shared via social media.

Uprise Africa

Uprise Africa is the leading equity CrowdFunding platform. It allows users to engage with a large group of equity investors. Unlike other platforms, Uprise Africa only allows registered members to invest in businesses.

Investors have to first register on the platform and pass the application process. To a great extent, this is a massive advantage. The reason being, entrepreneurs get to deal with serious investors only.

Entrepreneurs need to go the extra mile by creating a powerful brand. The brand story needs to be the selling point of the pitch, followed by financials.   All financials have to be legitimate as they are evaluated by analysts.

The entire campaign preparation process can take up to two months to build. Once the campaign is built, it takes an additional 1-3 months to run. Thereafter, shares and payouts take an additional 2- 4 weeks. The estimated time of the entire process could take approximately 6 months.  

Uprise Africa mainly focuses on larger CrowdFunding projects. Typically speaking, campaigns start at R3 million and can exceed the R10 million mark.  

Thundafund

Thundafund is one of the leading players in the CrowdFunding market in South Africa. Their platform is designed for creators and innovators. Entrepreneurs can raise capital for their projects and ideas through CrowdFunding. Furthermore, entrepreneurs can attain a supportive crowd of backers through the process.

To date, they have funded over 1,420 projects and raised over R56 million. Needless to say, they are one of the most popular platforms. Thundafund operates an ‘All-or- nothing’, ‘Rewards-Based’ crowdfunding model.

Entrepreneurs can choose the duration of their campaign. They have the option to choose from 30 days, 60 days and 90 days. If their goal is not met in that period then all investors are refunded (minus banking feed). If a campaign is successfully funded Thundafund takes a commission on the final amount. Certified NGOs pay 5% while individuals pay 7%.

For more information visit www.thundafund.co.za         

CrowdProp

CrowdProp is currently the leading real estate crowdfunding platform in South Africa. Unlike the previous companies, they only deal with properties. CrowdProp allows users to purchase a fraction of a property as an investment.

Having a share of a house with others makes it more affordable.  In order to make this possible, CrowdProp uses equity crowdfunding. As a registered and licensed financial service provider, they are fully regulated.

Investors in the property are paid out through shares and dividends. The returns are based on the rental income less the property-related costs. A minimum investment of R10,000 is required for anyone interested in investing with CrowdProp.

CrowdFarming

CrowdFarming was created to help farmers grow and maintain assets on their farms. In addition to making a profit for investors, this initiative helps farmers in need.

Investors purchase the assets (livestock or plant-based) from the farmer. The farmer then maintains the asset on his farm until it’s ready.  Once the asset is ready the farmer buys the asset back from the investor. Thus, allowing the investor and the farmer to make a profit.

Investment options in CrowdFarming include macadamia nuts, connected gardens, pregnant cows and oxen.  CrowdFarming has over 3,600 investors with over R100 million invested. Profits paid out thus far have exceeded R30 million. This initiative has helped over 70 farmers nationwide.

CrowdFarming is one of the best platforms to invest in as profits are always guaranteed. Farmers insure all assets, in case of an unfortunate event occurring. If your asset dies or gets damaged it will be replaced for free.

By investing through CrowdFarming, farmers and investors are able to make a profit and create jobs.

 If you’re interested in CrowdFarming you can visit https://livestockwealth.com/investments/ for all the details. Registration is quick and you can choose what you’d like to invest in.

Conclusion

In conclusion, it’s safe to say that CrowdFunding is an innovative way of raising funds. Gone are the days where businesses need to go to banks to receive funding for their projects. All it takes is a group of investors who contribute a small amount to a cause.  

CrowdFunding is a simple way of accumulating funds through a large network of investors. The brilliant thing about CrowdFunding is that businesses/ projects gain exposure. Thus, resulting in more publicity.

Normally, banks charge high interest rates, making it challenging for those seeking funds. With CrowdFunding, interest rates are a lot more competitive. This brings down interest rates, resulting in more room to grow.

While CrowdFunding is a great idea it does come with its own risks. Whether you’re an entrepreneur or investor there’s always something to lose. As an entrepreneur, you’ve got to worry about your business failing and what the consequences could be. However, as an investor, you have to worry about making a loss if a business fails.  

CrowdFarming would be the best option for those looking to invest. Your profits will be guaranteed and you will be creating jobs while helping farmers.