How are crowdfunding platforms adapting to the COVID-19 crisis?
We explore how crowdfunding schemes can prove their worth in these testing times with donation and royalty-based crowdfunding models likely to gain traction as the continent looks for investment in community-led initiatives and employment-intensive start-ups in the wake of the pandemic.
It is indeed easy to see crowdfunding growing exponentially in Africa, where community-based financial solidarity and fundraising are an integral part of the very culture and tradition of the people.
Giving for a cause
Across Africa, communities are accustomed to pooling funds to support various charity-focused, social and economic local projects. The importance of such social causes is only increasing as the proportion of vulnerable population in the continent rises. Indeed, a report by the Africa Union estimates that due to the COVID-19 pandemic, “nearly 20 million jobs, both in the formal and informal sectors, are threatened with destruction”, placing many individuals and households in a parlous financial situation.
Thus, it is likely that donation-based crowdfunding, which rewards donors in terms of the satisfaction of knowing that their money is going to be used for a good cause, will gain traction in the continent in a COVID-19 context. In Kenya, for instance, the tradition of “harambee” sees communities club together to hold events such as weddings and funerals. Against this backdrop, Kenyan start-up M-Changa offers an online platform for people to post campaigns, raising funds for events, school fees and medical treatment.
“An early response from the general public has led to over 130 Covid-related fundraisers started on M-Changa for sanitisation, PPE and food provisions for societies’ most vulnerable. M-Changa has created a community page to show verified campaigns in response to COVID-19 fundraisers that have been started by various organisations including Rotary Club, Penda Health, Jacaranda Health and Religious Groups,” notes Matthew Roberts-Davies, Experience Director, M-Changa.
Apart from M-Changa, other key crowdfunding platforms that are being leveraged across the continent for relief on a personal and community front are Kenya’s Pezesha, Nigeria’s Donate-ng and South Africa’s BackaBuddy and ThundaFund (with operations in Kenya as well).
Coming to the aid of start-ups and SMEs
Moreover, as the COVID-19 crisis increases banks’ reluctance to lend in view of delayed payments and interest moratoriums, investment-based crowdfunding initiatives can provide African entrepreneurs with the capital that banks are unwilling to lend.
In this context, there are a number of crowdfunding platforms with a focus on investments in Africa such as Mauritius’ FundKiss, South Africa’s Uprise.Africa, the DRC’s AB Crowdfunding and the WAEMU’s Afrikwity (covering Tunisia, Ivory Coast, Morocco and Senegal) that target the African diaspora as well as foreign sponsors by providing a plethora of investment opportunities in the continent.
Such platforms use a combination of various investment-based crowdfunding models, including:
- Equity-based crowdfunding, whereby investors receive share ownership in exchange for monetary contributions
- Debt-based funding (also known as “peer-to-peer lending”) where sponsors typically provide the projects with loans that deliver a rate of interest
- The royalty-based model, a less common variant which involves acquiring a royalty interest in the intellectual property of the fundraising entity in exchange for a monetary contribution
Crowdfunding trends gaining traction
Against the specific context of COVID-19, with equity investments inevitably posing more risk as investors must buy into the business, other crowdfunding models such as royalty-based crowdfunding are expected to find greater favour. No wonder then that Olive Crowd, the first equity crowdfunding platform to receive a licence in Mauritius, has recently launched a royalty crowdfunding scheme in addition to the mainstay equity crowdfunding model it was offering before the COVID-19 crisis struck.
Dhitoimaraini Foundi, the co-founder and CEO of Olive Crowd, explains, “Under royalty crowdfunding, an investor invests in a company and receives in return a percentage of the turnover achieved by the business every quarter over a period of 5 years. The rate of remuneration for the investor is fixed so the entrepreneur has to repay between 1.5 and 2 times the contribution of the investor over 5 years.”
In the specific case of royalty crowdfunding therefore, the investor does not become a shareholder in the company unlike in equity crowdfunding, but has the right to receive payments. Thus, the entrepreneur keeps all the control of the company and bears all associated risk, while the investor stands to receive regular payments without any of the attendant risk that being a business owner entails.
The way forward
As it becomes increasingly clear that COVID-19 will affect Africa on multiple fronts such as healthcare, education, business continuity and personal finances, among others, it is time for all stakeholders to come to the rescue.
In their capacity of alternative lenders using FinTech, crowdfunding platforms have already proved their worth to SMEs as an important source of finance, relying on technology that allows them to assess the creditworthiness of borrowers through alternative data and use of electronic platforms to process requests faster than traditional lenders. Now, in a COVID-19 context, as accessibility of finance and speed of lending becomes even more critical for SMEs, the opportunity for crowdfunding platforms to unite communities and empower entrepreneurs has never been more pronounced.
The Mauritius Africa FinTech Hub is a fast-growing ecosystem where entrepreneurs, corporations, governments, tech experts, investors, financial service providers, universities and research institutions can collaborate to build cutting-edge solutions for the emerging African market.