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Elizabeth Howard, Chair of the Board at the African Crowdfunding Association (ACfA) and its acting CEO, shares her insights on the changing face of investments as COVID-19 impacts businesses globally, especially Small and Medium Enterprises (SMEs) that have traditionally found it tougher to raise funds and are now reeling under the increasing credit constraints posed by the ‘new normal’. 

Elizabeth notes, “The economics of investing into small African businesses were very challenging before COVID-19. With company valuations likely to be under pressure for some time, many more businesses will enter the so-called “missing middle” in terms of the size of investment that they can consider. For SMEs that need growth capital but lack pre-existing relationships with investors, I would postpone fundraising as long as possible and bootstrap if needed. It is an expensive time to fundraise due to uncertainty and a smaller pool of investors (“buyers’ market”). A time and cost-efficient alternative is to use crowdfunding if it is available in your country and right for your type of business.”

Indeed, even as COVID-19 impacts businesses with lockdowns and social distancing measures creating physical barriers between SMEs and their stakeholders, be it investors, suppliers or customers, it has also created opportunities by accelerating the case for all things digital – a cogent example being crowdfunding platforms that are gearing themselves up to rise to the challenge of supporting SMEs with much-needed investment.

“Prior to COVID-19, crowdfunding platforms experienced challenges partnering with ‘mainstream’ capital providers. Since the latter are increasingly considering digitising their investment processes, crowdfunding platforms are well placed for institutional partnerships that would help to scale their activities. At the level of SMEs, the prospect of digitising their own operations is strongly favourable for crowdfunding platforms as it boosts transparency and reliability from the point of view of potential crowdinvestors,” explains Elizabeth.

Development finance institutions come to the rescue

No wonder then that, over the next 15 months, the World Bank has pledged US$50 bn to Africa’s economic recovery and has identified the protection of SMEs as essential to this process.

Elaborating on how the development finance community can come to the rescue of SMEs, Elizabeth adds, “This difficult situation should prompt development agencies to work harder at solving the ‘small deal problem’ and crowdfunding intermediaries should prove a useful partner for them. Development agencies should intervene at the levels of the industry, the intermediaries as well as the beneficiaries with technical assistance, grants and blended finance. Governments should play their part too by putting in place incentives for private investors in start-ups and SMEs. This has been critical to the success of crowdfunding in developed markets.”

However, she also cautions that the lack of an appropriate regulatory framework for crowdfunding in many African countries may be viewed by institutional partners as an additional risk at this already challenging time.

Specific crowdfunding models gaining traction

On specific crowdfunding models that are seeing increasing traction in the COVID-19 context, Elizabeth notes that the donations and rewards-based crowdfunding members of ACfA saw a significant increase in activity during the crisis period.

“Small businesses reached out to their client base with offers of vouchers, pre-orders and loyalty points to boost their working capital and retain staff. Another model of interest is crowdinvestment vehicles: low-cost fund structures that are set up by first-time fund managers who seek to build their track record in order to raise a larger fund later down the line. With many institutional LPs unable to consider new funds under current circumstances, listing such vehicles on crowdinvestment platforms may enable these fund managers to ‘close’ a smaller fund and stay on track,” she elaborates.

Indeed, ACfA was privileged to witness and participate in several interesting initiatives on the part of crowdfunding platforms towards supporting SMEs in Africa. Elizabeth mentions that ACfA members were “very active during the emergency response period” and one crowdfunding platform forming part of their membership base has designed an offering with COVID-friendly terms as well as tapped into public stimulus funding to be distributed through the platform.

Mauritius seeing the rise of a crowdfunding leader

Bringing the discussion closer to home, we ask Elizabeth if there any interesting initiatives that she is seeing in Mauritius from a crowdfunding perspective.

She emphasises that ACfA member Fundkiss continues to provide strong leadership to the Mauritian crowdfunding industry, while also building a track record on which to base their expansion and partnerships with institutional lenders.

“It is refreshing to see the ‘face’ of local Mauritian SMEs through their platform – a welcome change from the island’s usual association with large Private Equity funds that register in Mauritius and invest outside the country. Regarding the regulatory framework in Mauritius, we believe the regulatory sandbox licence (RSL)* remains the tool of choice for the moment,” she adds.

In response to our query on how the regulatory landscape is shaping up in the crowdfunding ecosystem in Africa, Elizabeth is happy to note that “much progress has been made in terms of building awareness and understanding of crowdfunding” within the regulatory authorities.

“ACfA alone engaged 17 regulators over the past year on the subject. Every regulator expressed an interest in enabling the industry, and some have made significant progress- for example, Nigeria SEC and Kenya CMA. Morocco and Tunisia are furthest ahead, having adopted legislation for crowdfunding. A benchmark harmonised regulatory framework is now available in the form of the ACfA Label Framework, and the conversation on innovative models of co-regulation and self-regulation continues. While the finish line is not quite in sight, we are confident that platforms seeking to launch a crowdfunding activity today will be well received by African regulators,” she elaborates.

Fast tracking: Why the case for crowdfunding is stronger than ever

Elizabeth concludes on the note that ACfA is well poised to play its part in this crucial process of bridging the gap between crowdfunding platforms and regulators, a case she acknowledges has been made more urgent by the pandemic.

“ACfA has proposed to its regulatory partners an immediate solution to enable crowdfunding in light of the pandemic. Using Letters of No Objection – or other tool in the regulator’s toolkit – in conjunction with the guidelines in the ACfA Label Framework and oversight capacity of ACfA, we can  create a path for crowdfunding intermediaries willing to test this innovation while protecting consumers. This essentially ‘sandboxes’ the crowdfunding intermediary and allows regulators to observe the market for a fixed period of time before legislating,” she emphasises.

As ACfA continues to act as a bridge between the crowdfunding community and regulators in Africa with a view to facilitate crowdfunding with the right frameworks, it is clear that its role as a self-regulatory organisation that promotes transparency and good governance in the crowdfunding industry will prove to be a crucial one in these testing times that are seeing a heightened focus on alternative means of funding for the SME sector.

With Mauritius’ latest Budget proposing a new sandbox framework to facilitate the development of innovative technologies, even as Budget 2019-20 had placed emphasis on the introduction on crowdfunding regulations, it is equally clear that the island economy is poised to play an important part in accelerating the growth of crowdfunding platforms in Africa.

*Interview conducted as on 01 August 2020, before the Peer to Peer (P2P) lending guidelines were released by the Financial Services Commission (FSC) vide the Government Gazette on 14 August 2020