Over the past few years, it’s become obvious to those who keep up with international markets that there’s a growing potential for investment in Africa. Though many Westerners still picture it as a giant nature preserve, the reality is that Africa is quickly becoming one of the world’s major emergent markets.
Small and medium enterprises (SMEs) are attempting to pop up all over the map. And African entrepreneurs are recognizing the needs around them – and coming up with solutions. But there’s just one problem: there’s a dearth of quality funding sources for African start-ups. Fortunately, there are several potential solutions to this problem, one of which is equity crowdfunding.
In the past few years, crowdfunding has changed the world. Websites like Kickstarter, Indiegogo, and GoFundMe have transformed the way that small and medium-sized businesses get going and build momentum. Crowdfunding has made it easier than ever to turn an idea into a genuine, profitable business. And the potential for using it to invest in Africa is huge.
With that said, it’s important to recognize that there are several different kinds of crowdfunding. Donation-based crowdfunding allows individuals to donate money to a startup with no expectation of a return. Reward-based funding, the main form used by Kickstarter, has funders receiving a reward based on how much they give. Equity-based funding provides ownership in the new company in exchange for funds. And lending-based crowdfunding is essentially a loan that the new business will have to pay off (with interest).
Though equity crowdfunding is more difficult for businesses to pursue, it’s also one of the most effective for SMEs. One of the things that makes equity crowdfunding so attractive for African startups is the fact that residents can easily invest in businesses that are in their communities. This would strengthen the connection between local people and the businesses that service them. It also increases the opportunities for these SMEs. Instead of having to appeal to a handful of big investors, entrepreneurs can take their idea to the masses and let whole communities have a say in what does and doesn’t succeed.
A handful of African companies have already begun seeing success, thanks to this equity crowdfunding model. A local brewery in South Africa, Drifter Brewery, was able to raise R3,889,000 (US$293,000) through equity crowdfunding. The business’s success has already enabled them to make their first payment to investors. Many investors interested in Africa’s potential have been encouraged by the success of Drifter Brewery. The question is, can equity crowdfunding succeed more broadly in Africa?
Several challenges face the possibilities of equity crowdfunding in Africa. First, there’s a complete lack of regulation in most African countries. This has driven up the cost of setting up and maintaining an equity crowdfunding platform. And if there are no platforms, there will be no crowdfunding. Until the nations in Africa get crowdfunding-friendly regulations in place, progress will be slow and scattered.
Second, crowdfunding platforms need to keep a tight rein on quality control as they venture into Africa. Many African consumers and investors have been burned. As a result, they’re naturally skittish about giving money to people that they don’t trust. African crowdfunding platforms need to vet and work with entrepreneurs in such a way that trust can flourish.
Finally, there are a number of African nations that have no easy way for people to make online payments. This is absolutely necessary for equity crowdfunding to work. And to deal with the issue, it’s going to take some major changes in the way that African nations handle online payments. But if they can adjust, there’s tremendous potential for investing in Africa.
Will equity crowdfunding sweep Africa? Only time will tell. But if the nations of Africa will see the potential in it and make the necessary changes, it could very well transform Africa’s economy and lead to incredible investment opportunities in this growing market.