Crowdfunding in Africa began as an informal practice, one that is rooted in traditional communal financial support systems such as the stokvels in South Africa. The stokvels, and similar systems to it are where community members pull money together to a communal fund to the benefit of each member. These collective funds in turn set the foundations for modern crowdfunding concepts.
Okay, but why are we talking about crowdfunding in Africa in this article? Well, one of the dominant trends in Africa since the advent of Covid is that crowdfunding, perhaps predictably, is now becoming increasingly popular as an accessible way for founders to raise capital. Why?, and where will crowdfunding go in the future?
Written by: Jonathan Ouyang
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THE RISE OF CROWDFUNDING
If there were any changes to investors in general since the pandemic, it would be that they have, en masse, become more risk-averse. Along with other reasons, this means that traditional financial flows have been quite heavily disrupted. Entrepreneurs, therefore, had to seek other ways to secure funding.
Indeed, crowdfunding gained popularity because it offers an accessible and inclusive way to raise capital directly from the public without the need for collateral or a credit history. So, not only did entrepreneurs have to attempt to increase crowdfunding, they now increasingly prefer crowdfunding over traditional financing precisely because of the aforementioned reasons.
The increase in demand for crowdfunding since the pandemic has been significantly influenced by an increased internet and mobile phone penetration. Platforms such as M-Changa in Kenya and Thundafund in South Africa have generated mobile money transactions exceeding USD 490 billion in sub-Saharan Africa in 2021. This foundation means that crowdfunding is likely to grow further as internet use in Africa grows even further.
A Growing Market
As of 2016, the African crowdfunding market was valued at USD 182 million. It is projected to reach USD 2.5 billion by 2025. Nigeria, South Africa, and Kenya are some of the leading markets in Africa for crowdfunding.
We believe this substantive growth will be derived from two main areas:
First, there is currently a significant funding gap for small and mid-size enterprises (SMEs) in Africa, which is estimated at around USD 330 million by the World Bank. Crowdfunding will be increasingly used to raise capital for these SMEs, especially since traditional institutions view SMEs as high-risk investments.
Second, Africa’s start-ups are notable for their aims to tackle local issues. Thus, it is likely that it will attract investments from the local population, who are currently experiencing an increase in disposable income as the middle-class in the continent is continuously increasing. Indeed, many SMEs with campaigns that promote social causes and community development are already gaining the attention of impact investors as they reflect the values and priorities of the African societies.
So, there is no doubt that crowdfunding is evolving in Africa. But is it all good news?
What are the challenges?
Well, even with an increase in demand for crowdfunding from founders, the success rate of crowdfunding campaigns hasn’t necessarily been on the side of founders. In fact, some research suggests that there is actually a decline in the success rate during the pandemic. The most prevalent reason is possibly, once again, the economic impact brought about by the pandemic, thus causing reduced access to capital. Nevertheless, studies have shown that a well-crafted campaign can significantly increase the chances of success. In the final section below, we will speak a little about what makes a successful campaign for crowdfunding to bring some insights into how the crowdfunding landscape may evolve as it becomes more extensive.
THE IMPORTANCE OF STRATEGIC CAMPAIGNS
Positive Factors that Contribute to Success
A study by Mamaro and Sibindi examined 215 crowdfunding projects and concluded that campaigns that have been closely linked to social network engagement and have a robust online community are the ones that are most likely to succeed. Mamaro and Sibindi found that the number of Facebook shares directly correlates with campaign success. Campaigns with shares between 1,000 and 10,000 have a probability of success reaching 43%.
Furthermore, the presence of images, videos, frequent social media updates, as well as a solid number of backers tend to nudge the probability of success up. These factors, in conjunction, highlight the importance of visual storytelling and continuous engagement in sculpting a successful campaign.
Negative Factors that Hinder Success
Conversely, a campaign with a funding target too high, as well as a large number of comments, tend to generate unsuccessful campaigns. And perhaps more notably, campaigns that have an extended duration generally observe a decrease in success rates.
These factors suggest that compact, and well-defined campaigns and a suitably chosen duration is able to maintain a sense of urgency that will spike donor interest. This was particularly true for sectors such as tech and medicine during the pandemic, where urgent funding needs drove significant public engagement.
This study thus provides a detailed look into some actionable insights for future crowdfunding strategies. Indeed, it may already be the case that founders are moving towards forging strategic campaigns. And with this, crowdfunding may continue to evolve into a more sustainable, and dominate financing model in the African VC landscape.
It is evident that Africa’s crowdfunding landscape has evolved significantly, where the integration of digital technologies and social networks have set the foundations for a bright future for this financing model. With the digital landscape undergoing a continuous revolution, the potential for crowdfunding to play a transformative role in Africa’s economic development is also on the rise.
And we hope that this article has provided some useful insights into the trends and mechanisms of crowdfunding in Africa! For more information on Africa’s VC landscape, keep an eye out for more analysis to come from LVCN!
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