The second of this four-part series on Crowdfunding as an alternative for SME funding will take you through the history, basics and process of Crowdfunding. It might just be what your small business needs. (Here’s the first)
There were 329 million unique mobile phone subscribers in sub-Saharan Africa representing a 38% penetration rate as at June 2014 and undoubtedly, thanks to the proliferation of lower cost mobile devices, a higher penetration will be reported once 2015 and 2016 data are released. In terms of mobile data usage, records show that 75,000 terabytes of data were consumed on a monthly basis across sub-Saharan Africa in 2014 and this is expected to grow to 764,000 by 2019. Facebook records show that in early 2014, there were more than 11 million unique and active users of the platform in Nigeria. It is reported that as at January 2015 there were 103 million active social media accounts in Africa; a pale number compared to the continent’s population, but this number is growing fast year-on-year. So it is safe to conclude that Africans are increasingly online and active on social media. An online presence therefore bodes well for realizing the full potential of crowdfunding in Africa.
Crowdfunding as a means of alternative financing is growing around the globe and there is no reason for African SMEs to be excluded from the sweeping wave of change. It is commonly acknowledged that access to financing is limited for small businesses globally but even more so in Africa. Their very nature impedes their ability to obtain credit from institutions such as banks and microfinance institutions. SMEs are either start-ups with little or no tangible and valuable assets to traditional lenders or existing businesses with weak structure in terms of hierarchy and segregation of responsibilities. In addition, they operate for the most part on thin margins and are unable to produce accurate financial information on their business in a timely manner.
Crowdfunding provides a breath of fresh air in the lending landscape for SMEs in the fact that access is open to all businesses regardless of their geographical location. The model rides on the advent of internet and thrives on the wings of social media. The access to capital barrier is therefore removed. Another upside for SMEs and start-ups is that the cost associated with processing an equity based or lending based scheme is relatively low compared to the traditional medium; no management or commitment fee; limited legal fee; the sole costs to worry about are the platform fee and/or payment processing fee which generally peaks around 10% of the total contributions and is a function of the project meeting its fundraising goal or not. It can be argued that the lending rates are themselves on the high side; but the conundrum is for SMEs to answer: easy access to loans at relatively high rate with no asset encumbrance or no access to funds at all?
Raising debt or capital via crowdfunding can equally be an appealing prospect for SMEs as it offers a platform to test the market viability of the product or service to be offered. The equation is simple: Right online marketing strategy
- Great and useful product/service = Quick uptake by backers. The right marketing strategy is important in disseminating information to the public about the project via family and friends. Little awareness means little chance of meeting the project goal. It is of more significance to the SME as it provides quality feedback to the entrepreneur. Analysis of the reason for failure can be carried out and findings used to adjust the product or service quality to meet the market expectations or re-strategize the winning marketing plan prior to launching the product via other means.
It should also be noted that young start-ups generally do not have at their disposal the colossal advertising budget which well-established brands enjoy. Crowdfunding is therefore a windfall that start-ups should grab: mass advertising at very little cost. Furthermore, analytics can help identify the best target segment for the product/service by focusing on the type of backers that were first or primarily attracted. This, of course, will save time in terms of go-to-market route.
Another important advantage of online funds sourcing for SMEs is the fact that at a click of a button (or a few), a locally oriented product/ service can become a global affair. Here is where the African diaspora could play a significant role in the development of the economies they originate from. Instead of the never ending monetary inflow to support families and friends, it might be a better alternative -though the effect will certainly not be felt in the short or medium term- to empower them to become economically self-sufficient by backing business ideas they might proffer and nudging them towards crowdfunding as a method to raise funds for their embryonic businesses. Like a wise man once said: Give a man a fish and you feed him for a day, teach a man to fish and you feed him for a lifetime.
The third part of this series will revolve around the question: “Does crowdfunding sound the trumpet for the decadence of traditional banks?”