Crowd investing: The power of the crowd

crowdIf you have a business idea that all your friends say they would invest in, or you have identified a business you want to put your money in, crowd funding could be your platform.

Crowdfunding is a growing trend that allows entrepreneurs to connect online with the public for cash to fund their business ideas. In 2012 alone US crowd investing platform KickStarter.com helped 18 000 businesses to raise $320 million from over 2.2 million people.

The concept was born out of a need to provide a platform that brings potential investors and budding entrepreneurs together, bypassing banks and investment managers as well as their exorbitant costs.

In November 2012 the first South African-based crowdfunding platform was launched and has already helped one entrepreneur get his own community-based newspaper, New Day, off the ground.

Miranda Simrie, managing director of Crowdinvest.co.za says they have over 300 registered investors; the problem is finding good-quality businesses. Of the nearly 100 queries and approximately 20 completed applications they have received, only three made it past their rigorous assessment process. “We do our due diligence; we look at who is behind the business, what their business profitability is and what the potential return to investors would be. Only those proposals that comply are listed on platform,” explains Simrie.

In the case of the community newspaper, the entrepreneur already had commitments from his community both to buy the paper and to advertise. He needed startup funds to print the paper and was able to raise R5 000 in just five days through the Crowd Invest platform. Investors received a 5% return after one month. Larger projects may offer a shareholding in the business to investors.

Simrie says businesses are given 60 days to reach their target investment amount. If not enough funds have been raised by that stage, then the offering is removed. Investors commit the funds but the money is not taken from their accounts until the business has reached its target amount, which means potential investors are never out of pocket if the capital-raising process is not successful.

Another company Dream Mobile, which required capital to develop a phone for the emerging market, failed to reach its target of R500 000 within the 60 days, raising only R40 000 which, while still a significant amount of money,  was not enough to launch the business and the money was not paid by the potential investors.

Simrie believes that as crowdfunding is a very new concept in South Africa, investors are still testing the waters by investing relatively small amounts of money into businesses, which makes a business plan with a lower investment target a more viable opportunity. As crowd investing gains popularity, this is likely to change – as it did in the US.

Starting small

While South Africans become more familiar with the concept of crowdfunding, smaller businesses and new projects may be a good starting point with crowdfunding, offering a return through a product or service but no equity stake.

Patrick Schofield, head of crowdfunding platform Thundafund.com, which will be going live later this month, says crowd investing is particularly beneficial to startup entrepreneurs and defined projects. Due to the low-cost nature of crowdfunding, investors can commit as little as R10, yet 100 such investors mean that the entrepreneur has raised R1 000 for her venture.

Thundafund.com focuses on creative and innovative businesses that also have a strong positive impact in society. It may be a small coffee shop that is looking to open or a woman who wants to buy a sewing machine to make children’s school uniforms.

Schofield says as these are new businesses they cannot offer investors a share in the business or significant returns so they offer products or services in return. A coffee shop owner may offer free coffees to their investors up to the value of their investment; the lady with the sewing machine could offer her sewing services in return; a budding wedding photographer could offer discounts on photographs of your big day; a playwright can offer backstage passes and show tickets. Payment through products or services not only provides an incentive for an investor but it also creates a natural market for the business owner. “Your 200 investors become your market. It is the perfect storm,” says Schofield.

While Crowd Invest puts their business applications through a rigorous vetting process, Schofield says for social enterprises the value of the money raised does not warrant the cost of business analysis. The idea is that the community that has invested in the business will be watching the entrepreneur to ensure their funds are not squandered – this can often be a bigger motivator than owing the bank money.

Schofield says crowd investing is also a great way to test your concept as it allows you to ask your potential market if they believe they would use it enough to invest in it. “if you say you have a great idea then ask the market if they would buy it. If so, ask them to put their money where their mouth is”.

 

CrowdInvest.co.za

Crowd Invest is registered with a global authority (crowdsourcing.org) which oversees crowdfunding however it is not required to be registered as a financial services provider in South Africa. Therefore there is no regulatory oversight although you would be protected by the Consumer Protection Act. The company has an internal board made up of people with good experience who are well known in the industry.

The businesses are vetted by a panel of experts in terms of their profitability, however this is no guarantee that the business will be successful. In most cases investors will be offered a return or a share in the businesses depending on the investment amount.

There is no minimum amount to invest but you do need to be over the age of 18, a South African citizen, earn over a certain threshold and have some previous investment experience.

Crowd Invest takes 5% of the money raised if successful but investment returns are based on the full capital amount raised. In other words this cost is carried by the entrepreneur and not the investors.

 

Thundafund.com

There is no formal analysis of the businesses listed on the platform however there are plans to create a panel of experts on a voluntary basis to provide input on business plans.

No minimum investment amount. Initial listed project sizes will range from R1000 up to R500 000.

Returns are mostly in the form of a service or product, protection for non-delivery of the returns is regulated through the Consumer Protection Act.

 

The Kickstarter phenomenon

US-based crowdfunding platform Kickstarter has raised millions of dollars for entrepreneurs since its launch in 2008. Recently the platform enabled Eric Migicovsky, a 26-year-old engineer, and his partners to raise millions of dollars to create Pebble, a watch that communicates wirelessly with iPhones and Android phones via Bluetooth technology.

Migicovsky, a Canadian, came up with the idea for a hands-free device for checking his email, texts and calls, while studying industrial design in the Netherlands where he was an avid cyclist.

In April 2012, after numerous rejections from venture capitalists and rapidly running out of cash, Migicovsky and his four partners approached Kickstarter to raise money from individuals online.

Once they launched their campaign, Migicovsky and his partners expected to have to wait a month to find enough individuals to commit $115 each to pre-order a watch to raise their target. Within two hours, Pebble had hit its goal of $100,000. That night, they had reached $600,000. Migicovsky went out for a beer to celebrate, went home and went to sleep. When he woke up, Pebble was at $1m.

Within six days, the project had become the most funded project in Kickstarter history, raising more than $4.7m with 30 days left of the campaign. Within 30 days, Pebble had raised $10.27m from 68,929 people on Kickstarter.

(Source: Financial Times)

 

This article first appeared in City Press

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