Crowdfunding

Get your ideas Funded: A beginner's guide to crowdfunding in South Africa

Crowdfunding is a relatively new way for South African entrepreneurs to access funding from a large pool of investors, including individuals and institutions, through online platforms. It allows businesses and projects to raise funds by pitching their ideas to a large group of people, who can then choose to invest in them. Crowdfunding has become popular in South Africa due to its accessibility, cost-effectiveness, and ability to reach a broader audience beyond traditional funding sources.

The rise of crowdfunding in South Africa: The first platforms to grace our shores

Crowdfunding has been around for over a decade, with the first crowdfunding platform launching in 2013. It was Thundafund, which launched in 2013. It was followed by a few other platforms such as StartMe, Jumpstarter, and Uprise.Africa.

Initially, the concept was slow to catch on, with only a handful of campaigns launched each year. However, in recent years, crowdfunding has gained significant momentum in the country, with more and more entrepreneurs, creatives, and social activists turning to the model to finance their projects. Today, several crowdfunding platforms are operating in South Africa, each with its own unique focus and approach.

Crowdfunding in a nutshell: What is it and how does it work?

Crowdfunding is a way to raise funds through the collective effort of a large number of people, typically via an online platform. Instead of relying on traditional methods of funding like banks or venture capitalists, crowdfunding campaigns allow individuals to pool their money and support towards a common goal.

This can be done through various types of crowdfunding models, such as donation-based, reward-based, equity-based, or debt-based. Crowdfunding has become increasingly popular in recent years due to its accessibility, efficiency, and ability to connect entrepreneurs and creatives with potential investors or customers. It has also provided a platform for underrepresented groups to access funding that may have been previously unavailable to them.

The four types of crowdfunding explained

There are different types of crowdfunding models, each with its unique approach and benefits. The most common models are donation, reward, equity, and debt-based crowdfunding and we’re going to take a quick look at each type.

1. Donation-based crowdfunding where people making donations to support a cause, project, or individual without expecting any form of reward or equity in return. This model is typically used by non-profit organisations, charities, and social activists to raise funds for their initiatives.
2. Reward-based crowdfunding allows individuals to raise funds by offering rewards to backers who contribute to their campaigns. These rewards can range from simple thank-you notes to early access to products or services. This model is often used by entrepreneurs, creatives, and artists to fund their projects and startups.
3. Equity-based crowdfunding enables entrepreneurs to raise funds by selling shares of their companies to the public. In return, investors receive equity in the business and stand to benefit from its success.
4. Debt-based crowdfunding, also known as peer-to-peer lending, allows individuals to borrow money from a pool of investors who are looking to lend money for a return. The borrower agrees to pay back the loan with interest over a specified period.

The regulatory framework applicable to this type of funding

Crowdfunding in South Africa is subject to a regulatory framework aimed at protecting investors and ensuring compliance with financial laws. The primary regulatory body overseeing crowdfunding in South Africa is the Financial Sector Conduct Authority (FSCA), which requires any person or entity soliciting investments from the public to be licensed as a financial services provider (FSP). This means that crowdfunding platforms that offer equity-based or debt-based crowdfunding must comply with the regulations set out by the FSCA or risk facing legal action.

In addition to the FSCA, other regulatory bodies may also be involved, depending on the type of crowdfunding being used. For example, donation-based crowdfunding may fall under the jurisdiction of the Department of Social Development, while rewards-based crowdfunding may be subject to consumer protection laws.

Both creators and investors need to be aware of the legal implications of crowdfunding and to ensure that they are compliant with the relevant laws and regulations. This includes understanding the licensing and registration requirements, complying with tax regulations, and adhering to the rules set out by the crowdfunding platform.

Raising funds the modern way: Crowdfunding pros and cons

On the plus side, crowdfunding platforms provide access to a large pool of potential investors, which can help to increase visibility and raise awareness for a project or business. Additionally, crowdfunding can be a cost-effective way to raise funds, with little to no upfront costs or financial risk.

However, there are also some downsides to consider. Intellectual property rights can be difficult to protect in a crowdfunding campaign, and legal compliance can be a complex issue. Furthermore, many crowdfunding platforms charge fees, which can eat into the funds raised. It is important to weigh the pros and cons of crowdfunding before deciding whether or not it is the right fundraising method for your project or business.

Let’s take a closer look at some of the advantages.

Access to a large pool of investors: Crowdfunding platforms enable creators and entrepreneurs to access a worldwide pool of potential backers who are interested in supporting their projects or business. This can enhance the visibility and awareness of the venture and can boost the probability of reaching the fundraising goal.

Crowdfunding provides a chance to develop a community of supporters and fans around the project or business, which can offer continued support and even aid with future fundraising efforts. In general, crowdfunding presents a compelling approach to connecting with a vast audience of investors who share a passion for a specific concept or cause and are willing to contribute to its success.

It’s a cost-effective way to raise funds: Traditional methods of fundraising often require significant upfront costs, such as marketing materials or hiring a team of professionals. In contrast, crowdfunding platforms typically require little to no upfront costs, which can make it more accessible for entrepreneurs and creators who may not have the resources to invest in expensive fundraising efforts.

This can help to level the playing field and give smaller businesses or projects the chance to compete with larger, more established entities. Additionally, crowdfunding campaigns can be launched quickly and easily, allowing creators to focus on building their projects rather than spending time and money on fundraising activities.

But, you should also take the disadvantages into account, so let’s take a closer look at these.

Protection of intellectual property rights: To attract potential supporters, creators need to reveal information about their product or invention while launching a crowdfunding campaign. But, if they share too much information early, it can lead to the loss of their intellectual property rights. Others may take the idea and develop it independently, or even copy it without authorisation.

Creators must understand how to safeguard their intellectual property by filing patents, trademarks, or copyrights before launching a crowdfunding campaign. Moreover, creators must consider the risk of exposing too much information and provide only the necessary information to attract backers.

Issues with legal compliance: The Financial Sector Conduct Authority (FSCA) requires anyone seeking investments from the public to be licensed as a financial services provider (FSP), which means that crowdfunding platforms offering equity-based or debt-based crowdfunding must comply with the FSCA regulations or risk legal consequences.

Furthermore, tax regulations and other laws can vary depending on the crowdfunding model and the nature of the project or business being funded. It is thus essential for creators and investors alike to be aware of the legal implications of crowdfunding and to ensure compliance with the applicable laws and regulations.

Is crowdfunding the right funding choice for you?

The below list may help you decide whether or not crowdfunding is the right option for you. By considering these factors, you can determine whether crowdfunding is a viable option for your project or business.

• Funding goals: Determine how much funding you need to achieve your project goals. Crowdfunding may be a good option if you need a relatively small amount of funding, as most campaigns are geared towards raising up to a few hundred thousand Rand.
• Project type: Consider whether your project would be a good fit for crowdfunding. Some platforms are better suited for creative projects, while others focus on social impact or technology-based ventures.
• Network: Evaluate the strength of your personal and professional networks. Crowdfunding success often depends on having a strong network of supporters who are willing to back your project and help spread the word.
• Marketing skills: Assess your marketing and promotion skills, as crowdfunding campaigns require extensive promotion and outreach efforts to attract backers.
• Legal compliance: Understand the legal and regulatory requirements for crowdfunding in South Africa, including obtaining the necessary licenses and complying with financial regulations.
• Risk tolerance: Determine your risk tolerance, as crowdfunding campaigns can be unpredictable and there is no guarantee of success.
• Time commitment: Consider the time and effort required to plan, launch, and manage a crowdfunding campaign. It can be a significant time commitment, and may not be suitable if you have limited availability.

Maximising your fundraising potential: Tips for selecting the perfect crowdfunding platform

Choosing the right crowdfunding platform is an important step in ensuring the success of your fundraising campaign. With so many options available, it can be challenging to determine which platform is best suited to your needs but we’re here to help.

When selecting a platform, consider your project type and funding goals, as well as your target audience. Some platforms specialise in specific types of projects, such as creative endeavours or social impact initiatives, while others cater to a broad range of industries and projects. It's also important to research the platform's fees and terms of use, as these can vary significantly from one platform to another.

Look for user-friendly platforms, that offer excellent customer support, and have a strong track record of successful campaigns. Additionally, consider the platform's reach and visibility, as some platforms may have a larger user base than others. By taking the time to carefully evaluate your options and select the right crowdfunding platform, you can significantly increase your chances of fundraising success.

We have seven crowdfunding platforms listed on our website for you to consider. We’ve listed these in alphabetical order rather than size or preference.

The leading crowdfunding platforms in South Africa

1. Angel Investment Network: This is a global platform that connects startups with angel investors. The platform allows entrepreneurs to showcase their businesses and ideas to a network of potential investors and provides a range of tools and resources to help startups grow and succeed.
2. BackaBuddy: is a South African crowdfunding platform that focuses on charitable causes and community projects. The platform allows individuals and organizations to raise funds for a wide range of causes, including medical expenses, education, and disaster relief.
3. GoGetta: is a South African crowdfunding platform that focuses on small business loans. The platform connects borrowers with investors and provides a range of tools and resources to help businesses grow and succeed.
4. Jumpstarter: is a Hong Kong-based crowdfunding platform that focuses on innovation and technology projects. The platform allows entrepreneurs to showcase their ideas and products to a global audience of potential investors and supporters.
5. The People's Fund: is a South African crowdfunding platform that focuses on community-driven projects. The platform allows individuals and organizations to raise funds for a range of community-based initiatives, including housing, education, and social enterprise projects.
6. Thundafund: is a South African rewards-based crowdfunding platform that focuses on creative and innovative projects. The platform allows entrepreneurs to showcase their ideas and products to a community of potential backers and provides a range of tools and resources to help projects succeed.
7. Uprise.Africa: is a South African equity-based crowdfunding platform that focuses on startups and small businesses. The platform allows entrepreneurs to raise funds from a community of investors in exchange for equity in their businesses.

Crowdfunding has become a popular way for South African entrepreneurs to access funding from a broad range of investors, including individuals and institutions, through online platforms. The model has gained significant momentum, with several crowdfunding platforms operating, each with its own unique focus and approach.

While it presents a compelling approach to connect with a vast audience of investors and is cost-effective, there are also downsides to consider, such as legal compliance and fees charged by crowdfunding platforms.

Ultimately, it is essential to weigh the pros and cons of crowdfunding before deciding whether it is the right fundraising method for a project or business. We encourage you to review our collection of crowdfunding platforms to find the best fit for your next big idea.