Crowdfunding is having a moment in SA. Besides the R500 000 raised for a service station attendant who came to the aid of a young woman by paying R100 to top up her tank, ‘the crowd’ recently invested R32.7 million in a start-up company.
Intergreatme, a company that allows people to electronically store and send documents to validate their identity, raised about R3 million more than it anticipated it would through an equity crowdfunding campaign in late May.
Crowdfunding, the practice of getting a large pool of people to support a project or person by investing a small amount of money each, is gaining traction locally. BackaBuddy, the funding project used to raise money for service station attendant Nkosikho Mbele, for example, has so far generated over R107 million for various causes.
For its part, Uprise. Africa, the platform used to raise the funding for Intergreatme, enabled 420 investors to take a 25% holding in the three-year-old company, giving it a total valuation of R120 million.
Next step online trading in crowdfunder shares
Although it is still early days – Uprise. Africa has only been around for about a year – things are moving quickly for the group. Uprise. Africa CEO and co-founder Tabassum Qadir say the company is in negotiations with one of the new share trading exchanges to have equity crowdfunding investors trade their holdings on its platform.
Although crowdfunding has long been used to support start-up ventures, equity crowdfunding is different as it enables people to become direct shareholders in a venture.
This is in contrast to traditional crowdfunding services that generally only allow contributors to get new products from the ventures they support for free.
To ensure that the interests of investors are protected, Qadir says prospective companies need to be vetted by its investment committee. Once approved by this committee, a designated Uprise.Africa board member will act as an overseer of investors’ interests in the company.
In exchange for about R24 000, Uprise.Africa will conduct due diligence and organise a 90-day ‘campaign’ to build interest in the company.
Qadir says using crowdsourcing to support start-up businesses is widely seen as a way to drive economic development. The World Bank, for instance, estimates that the global equity crowdfunding sector will be worth more than $93 billion by 2020.
Herman Singh, an angel investor in Intergreatme, says equity crowdfunding had the potential to be a vital link between those looking for investments and those businesses in the early stages of development searching for investors.
Without it, prospective investors either have to wait for a company to be listed on the JSE, or invest at least R100 000 into a venture equity firm’s portfolio to get a stake in emerging businesses. With equity crowdfunding, however, for as little as R1 000, they could get a stake in a company as it is about to enter a fast-growing stage.
Intergreatme CEO and co-founder Luke Warner says equity crowdfunding essentially formalized the way “friends and family” could invest in his business.
Qadir points out that crowdfunding investors are not necessarily looking to make money – in many cases they just want to support the people or businesses they believe in. “It enables your social network and people who are interested in the products to be part of the company.”
Cheers to a great idea
She says this can be seen in the campaign to get investment in the Drifter Brewing Company. The people involved love making beer and were looking to get people who love beer as much as they do to be a part of the business.
Warner says trying to find people who were passionate about the idea behind Intergreatme was also a way for the business to find out if there was big enough demand for its service.
“It validates what you do, he adds.”
Singh, a former executive at Standard Bank and MTN, says venture capital firms should consider using the validation of the crowd to assesses whether they should invest. A venture capital funder can, for example, stipulate that a start-up first raise money through crowdfunding before it decides to invest.
Aside from the funding itself, the flexibility of the equity crowdfunding shareholding structure is appealing for start-ups. It means, for example, that once the Intergreatme transaction is complete, Warner will become the controlling shareholder despite only holding 12% of the group.
This is because plans for the voting rights of the venture’s angel investors to be transferred to him were put in place. The idea is that by giving him full control, he will be free to grow Intergreatme quickly, as long as he meets specific benchmarks.
Singh backed the idea of giving Warner this kind of control. “You need a very unusual structure to be strategic,” he says.