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Equity Crowdfunding In SA Explained

Here’s a brief snapshot of what it is and how it could benefit your business.

Daniel Van Zuydam

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As an entrepreneur, finding the right funding for your specific start-up is hugely important.

With momentum around crowdfunding growing on a global scale, there is talk about equity crowdfunding becoming a viable option in South Africa. This is very good news indeed, as it has the potential to significantly boost economic growth.

Here’s a brief snapshot of what it is and how it could benefit your business.

Equity crowdfunding is a simple concept: Members of the public (the crowd) are offered equity (shares) in a company (generally a start-up) in exchange for funding. The company then uses that funding to kick start the business.

Related: Quick Shift Deva Kate Emmerson On Crowdfunding

Donations-based crowdfunding and rewards-based crowdfunding have started to gain some traction, with local players such as Thundafund (rewards based) and Backabuddy (donations based) leading the charge; however South Africa is still lagging behind much of the rest of the world, mostly due to the lack of precise legislation around crowdfunding.

The Financial Services Board are yet to decide how they will regulate crowdfunding in South Africa, and so interested parties have been hesitant to engage with crowdfunding, with no-one attempting equity crowdfunding to date.

Another major hurdle is that private companies are not allowed to offer their shares to the public, and the difficulty of registering as a public company is simply too great for a start-up to even bother with. The reason for such stringent requirements though, is to essentially stop fraudulent schemes. The last thing you would want to do is fund an extra round of piña coladas in Mauritius for the opportunistic con-man – the government is therefore right in trying to regulate this area.

Related: Kickstart Your Business Through Crowdfunding

Uprise.Africa

There is, however, light at the end of the crowdfunding tunnel – a new start-up Uprise.Africa aims to launch towards the end of this year. Uprise.Africa will be the first of its kind in South Africa in that it will offer the man on the street the ability to invest in a startup of his choosing and receive equity (shares) in exchange for that investment. This is great news for start-ups, as the public will have a vested interest in the success of the business.

Take the example of a microbrewery wanting to launch their brand and get off the ground: Instead of the public (crowd member) receiving a reward in the form of a case of beers for their contribution, they will receive shares.

They will (probably) order a case of beers from the microbrewery and tell their friends to order beer from the microbrewery, as they will get a financial benefit if the microbrewery succeeds. The microbrewery, as a result, receives funding three times over instead of once – which is a powerful tool for growth.

Essentially, the crowd will be a business partner with the start-up, and in so doing, the first customers of the start-up are already waiting in the wings.

Related: 6 Resources For Start-Ups Looking For Alternative Funding

The World Bank recently predicted that the market potential in Africa for crowdfunding will be up to $2.5 billion by 2025. Equity crowdfunding in South Africa will hopefully tap into that and unleash significant potential in the startups that are based here.

The hope is that the regulators, when they do eventually regulate crowdfunding, do it in such a way that it is not a death knell for the system that has the potential to significantly boost our economic growth.

About Daniel Van Zuydam: Daniel joined Dommisse Attorneys in 2017 as an associate in the Transactional Team. His areas of focus are corporate finance, mergers and acquisitions, and corporate restructuring. Having come from a background in commercial litigation, he has learnt the ins and outs of trust and company interrelated structures and has a passion for structuring enterprises in dynamic ways to suit the needs of each client.

How to Guides

3 Start-up Funding Tips To Help Launch Your Company

Most great ideas are just dollars away from becoming the next big thing. It is important to do your research and never quit.

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Starting a start-up is one of the most terrifying and rewarding experiences anyone can ever have. It is rife with decision making and hard choices. Coming up with the product and showcasing it to people you know and outside investors is an incredible thrill. There is also immense stress that comes with owning a start-up. This comes, primarily, in the form of finances.

Those who own a start-up know that money is hard to come by and, whatever money there is, is immediately put to use. That is why venture capitalism has grown to the rate that it has. In the early 2000s, start-ups were not the hot ticket that they are today and since the tech boom we have seen a dramatic rise in the amount of start-ups year-to-year. The issue is not where to get the money, but, how?

In this article we hope to cover the basics of start-up funding that will increase the amount of exposure you get and increase the odds of receiving funding. Most great ideas are just dollars away from becoming the next big thing. It is important to do your research and never quit.

Related: Angels & Demons: What To Know When Negotiating Equity Funding For Your Start-up

1. Focus On Vision

One thing that advisors and investors will both look for in a company is what that company stands for. In essence, it is important to reduce your business to a singular idea that represents the whole accurately and with great fervour.

The goal of your business should be stated clearly so that any potential investor knows exactly who they are investing in. For instance, if your business is centred around helping the disabled use computers, then state that clearly and let investors know. Simply put, investors do not want to invest in entrepreneurs who are only interested in making money.

While making money is a very positive thing, it should not be the sole reason for any endeavour. Your company’s vision should be the key aspect of your pitch and your investment stack.

2. Run The Data

It is crucial that all entrepreneurs know their business inside and out. This means searching for similar businesses and getting their numbers. Get to know the market like the back of your hand and keep a record of any data you come up with.

Investors want to see the average ROI in an industry. They want to see what the average operating cost is and how much they should invest to make your product viable. Even though this can be a difficult step, there are a number of outside resources that can gather market data for you but it is an important step to learn everything you can about the market you’re entering.

3. Seek More Than Money

One of the most valuable assets to any entrepreneur is a trusted advisor that can help you in your journey to success. It is tempting for startups to go out into the world and make deals on their own. While that is a fine strategy to use it may not be the best way to go about funding your business.

Related: The Investor Sourcing Guide

Seeking the help of an advisor can save you a lot of headache and heartache. Typically, advisors can help you manage your funds and gain traction in the VC world. Ambling through the dark to try to find funding can oftentimes lead to deals that are either one-sided or unsound. Having an advisor there to guide you and double check all of your work can prevent loss and will give you the edge you need in negotiating. Indeed, one of the most valuable assets to any company is their advisor.

When starting a start-up, you are faced with an overwhelming amount of tasks and things to do that can hamper your progress. Add, on top of everything else, the need for funding and then you can get into a real snafu.

The best way to fund your business is simple. You have to be yourself and know your value in the market. You also have to trust outside help to guide you in your path to business growth. Through the use of advisors and in the process of synthesising your businesses goals, you can make a business that will succeed in any climate. Funding a start-up can be a laborious task, but, if you know how to approach it, you can make it an exciting journey that validates your business and leads to a land of opportunity.

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How to Guides

How To Craft A Crowdfunding Campaign

Successful crowdfunding ideas come in all shapes and sizes.

GG van Rooyen

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Successful crowdfunding ideas come in all shapes and sizes. Publisher Colleen Higgs and author Ambre Nicolson decided to publish a book through crowdfunding.

Even if you’re an existing business, crowdfunding can provide a way to fund a product or project that would otherwise be out of reach. This was the case with A to Z of Amazing South African Women, a bright and colourful book with bold illustrations that celebrate impressive South African women.

“I came across a book published in the US called An A to Z of Rad American Women and posted something on social media saying that I thought there should be a local version. A clever friend of mine called my bluff and suggested that we make one together, and so the idea was born. Publisher Colleen Higgs immediately saw the potential for the project and came on board. From the very beginning, it seemed to resonate with people — particularly women — and it is really due to their support that the book saw the light of day,” says author Ambre Nicolson.

Related: 6 Resources For Start-ups Looking For Funding

“Modjaji Books was very keen to publish the A to Z of Amazing South African Women, but we didn’t have the ready capital to fund a book like this, which is more expensive to produce than our usual text-based books,” says Colleen. “We needed funding just for this book, so crowdfunding seemed like the right idea. There are not many other ways of funding books in South Africa.”

The Thundafund crowdfunding campaign was a success, raising R104 400, slightly more than the stated goal of R100 000.

“You need to remember that a crowdfunding site typically takes a percentage of what you make, and then there are the bank fees to consider as well, so aim for about 15% more than you think you need,” says Colleen.

And how do you create a campaign that’ll provide you with all the funds you need? “I think the storytelling aspect of the campaign is very important. You need to give people a reason to care. In our case we wanted to showcase the strength and resilience of South African women, and this resonated with backers. Put time into the description of your project and into creating strong images. Your campaign has to compete with everything else vying for people’s attention online,” says Ambre. 

Crafting a campaign

As is the case with just about anything, success in crowdfunding is a result of hard work and dedication. A great campaign requires an engaging story, a desirable product, clever marketing and a solid understanding of business fundamentals. Without a good story and product, people are unlikely to fund the campaign. Without a good strategy to turn a successful campaign into a successful business, backers can be left angry and disappointed.

“While every project is different, we have found that one of the most common factors with successful campaigns is the project itself: The idea, layout of the project page, and the whole concept must say the right thing to the right audience,” says Nicholas Dilley of South African crowdfunding platform Thundafund.

“Another thing that project creators are always encouraged to do before their campaign goes live is to build up a network of supporters who believe in their campaign.”

Lastly, the rewards offered are obviously also important. “Thundafund is a rewards-based crowdfunding platform so, as expected, the rewards play a fairly large role in a campaign’s success. While the rewards may not be the icing on the cake in every campaign, they can make a small donation turn into a large one in some cases. Certain rewards can help build the credibility of a new brand, or even test the market to see which of your products will be most successful in the future of your business,” says Nicholas.

Related: 4 Tips To Secure Funding For Your Start-up

Trust is key

When it comes to crowdfunding, the most important thing is trust. By funding a venture or product that doesn’t exist yet, backers are placing a massive amount of trust in the entrepreneur. This trust can never be broken. The results can be disastrous, and can follow you long after you’ve abandoned your failed crowdfunding campaign.

From the outset, you should ensure that people understand what you are offering in return for funding.

“Rewards-based crowdfunding is not very well understood in many parts of the world. When you say ‘crowdfunding’, people tend to think it’s some sort of charity, or that people are buying shares in a business. Rewards-based crowdfunding is essentially pre-selling a product online, and most people are not aware of this. It’s important that you make this clear to people,” says Steel Cut Spirits CEO, Rob Heyns.

Trust usually comes down to honesty and open communication. Issues will almost inevitably arise, but it’s important to relay these to backers. Don’t disappear from your website or social media platforms for months and leave them wondering where you went with their money. Keep them in the loop at all times, especially if you’re dealing with unexpected problems.

“You need to prove that you will deliver, and then you actually have to do so once the campaign is completed,” says Rob. “I personally took full accountability for this campaign, as it can be easy to hide behind a product, brand or company when problems occur. We also aligned with key partners to ensure we could deliver. We were supported by Yuppiechef, so we knew we could execute on the e-commerce part, and we chose Thundafund as we knew they were the best option to execute on rewards-based crowdfunding in SA.

“We did mess up the communication with two backers who bought smaller rewards. It was merely a miscommunication, but it was eye-opening to me how great an effect such a mistake could have on a customer. We went to great lengths to solve the mistakes but it did concern me that there is an even higher trust-related expectation with crowdfunding than with normal e-commerce.”

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Company Posts

Alternative Finance – Filling The Gap

Alternative Finance is finance beyond the traditional – it is defined by the financiers’ area of specialisation – by what they specialise in, whom they serve, and how they provide their funding.

Spartan

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Alternative Finance is finance beyond the traditional – it is defined by the financiers’ area of specialisation – by what they specialise in, whom they serve, and how they provide their funding. It does not replace traditional finance but rather functions as a complementary and additional form of funding.

Alternative financers are specialists – they focus on a particular need and on a specific audience. As a result their ‘how’ is customised to deal with their chosen target market and for this targets unique needs. This applies to the funder’s processes and to their level of flexibility around things such as collateral. An example of this is that a SME may have an existing R1 million overdraft (their traditional finance) secured by R 1.5 million collateral but suddenly they need R5 million for some kind of contract or bridging finance – they need it fast and don’t have that extent of collateral.

The traditional funder cannot provide what they need, their process is too long and their flexibility is too low. An alternative financier providing bridging finance and specialising in SMEs is ideally positioned to fill this gap.

Related: 5 Key Questions To Answer For Raising Funding

One of the most significant differences between a traditional funder and an alternative financier is in their process. In the case of the alternative financier, they have often chosen to deal exclusively with a particular customer base, for example SMEs. As a result, this funder has both an affinity and contextually relevant empathy in working with SMEs.

Not only do they speak the same language the funder also has an appreciation for the time and material constraints of the SME and has developed their processes to cater to this market. This applies most notably to the turnaround time of the funding need and to the assessment aspect – where flexibility around things such as collateral is vital in making the finance happen for the SME.

A traditional funder is unable to meet the deadline of a bridging finance need, submitted on an urgent basis, where the finance is needed as soon as 2-3 days from time of application. A specialised or alternative funder is able to do exactly this. A traditional funder is also unable to find creative methods in solving the SMEs lack of high-value collateral in applying for finance.

This SME has generally already used their high-value collateral for traditional credit facilities but now needs funding for growth or resolution of a temporary cash flow challenge. An alternative financier is able to look at such an application in a different way, and has most likely already established alternative ways to make this happen for the SME.

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