Startups And Small Businesses: Consider Crowdfunding

A novel and effective way of raising finance 

It is well known that finance is extremely hard to raise for small and medium sizes entities (SMEs). Banks are very conservative and prefer to deal with the larger, more established businesses. The venture capital market is small in South Africa and many SMEs fail due to a lack of finance.

Globally, crowdfunding has taken off and has also been successful locally in the past few years.


What is crowdfunding?

It consists of an online platform that puts investors in touch with any kind of organisation that requires funding – it can for example be a startup business, a one-off project or perhaps an N.G.O. looking for funding.

The online platform tracks how the required funding is being met. 

It is best illustrated by looking at a crowd funding portal or two – see examples like Startme and Jumpstarter  - Google for more.


How do I make use of it?

Many of the funding requests fail and one of the most successful United States platforms has some excellent advice for using a crowdfunding platform:
  • You need to have expertise on the web and social media. 

  • Plan and prepare. This is crucial. You need to have a great strategy for reaching investors. A video is a good tool for this. The video should come from you or a member of the team to communicate your passion and commitment.

  • Be transparent, honest and specific. The funding required should be detailed and not general. Thus, if you need R100,000 break this down into discrete amounts e.g. R20,000 for advertising, R20,000 for selling expenses etc.

  • Get your friends or colleagues to contribute – launching on a crowdfunding site with some funding already secured is a key success factor. US platforms advise that having 30% secured funding makes a considerable difference to the campaign.

  • Use influential people – well known bloggers, for example, can spread the message which can get momentum going

  • Always be proactive as being in frequent contact with potential investors will enhance your credibility. Make widespread use of social media platforms – they can be powerful e.g. the recent strike in Zimbabwe was inspired by a social media video.

  • Have set time limits for raising the funds. This creates a sense of urgency plus people have limited attention spans. Most sites recommend a one to two month fundraising cycle

  • Reward your investors. It doesn’t have to be large sums but if you are, say, making a documentary, give investors free copies. If it is for an N.G.O. send funders letters of thanks from the beneficiaries.

  • Have a good team in place as planning and executing the campaign are very time intensive

  • Always remember that some fund raising simply does not work. However many of the failed efforts have brought benefits as it has taught valuable lessons. In one instance, a business relaunched its campaign with fewer, more simple concepts and was then able to raise  their required funding.

Tax issues   

There are many tax issues here – for example prepayments can fall into taxable income for the recipient. Speak to your accountant. This has the potential to derail a campaign.

Crowdfunding is up and running – it definitely works. Think about using it.  
Disclaimer
The information provided herein should not be used or relied on as professional advice. No liability can be accepted for any errors or omissions nor for any loss or damage arising from reliance upon any information herein. Always contact your professional adviser for specific and detailed advice.