6 KEY LESSONS ABOUT CROWDFUNDING FOR ENTREPRENEURS

Based on lessons learned from the first adopters in Africa, this article offers a practical guide for entrepreneurs looking to more effectively utilize crowdfunding across all emerging markets.

Crowdfunding is a method for raising monetary contributions from a large number of people without geographical barrier – typically online to fund a project or venture. In the past 10 years, crowdfunding has evolved into a $16 billion market. It is growing around 300 percent per year and is concentrated in North America and Europe.

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The total crowdfunding market is composed of various sub-types, including lending (debt), equity, and royalty-based models, as well as non-securitized types, such as charitable donations and rewards crowdfunding. Over the past few years, lending crowdfunding has been the fastest growing type. The total crowdfunding market in the developing world was projected to be about $327 million for 2015 – about 2 percent of the global total.
Developing countries in Africa are among the lowest performing in the world in terms of utilizing crowdfunding. Despite its slow adoption for African entrepreneurs, crowdfunding has been heralded as an opportunity to expand access to capital for entrepreneurs. Despite the hurdles, African entrepreneurs are utilizing innovative strategies to overcome the challenges they face when raising money from crowds.

Here are six key lessons for entrepreneurs in Africa and other emerging markets as they consider when, why and how to launch a crowdfunding.

1. Crowdfunding is much more difficult than most entrepreneurs anticipate and is not for everyone. Opportunity costs abound.

Running a successful campaign requires significant human and financial resources. Entrepreneurs should research other crowdfunding campaigns in similar sector or geographic areas to understand what to expect and carefully consider how the opportunity costs of crowdfunding compares with other available sources of capital.

2. Business needs should dictate platform choice.

Entrepreneurs should realistically assess how much capital can be raised from crowdfunding platforms that serve their geographic areas. Debt and equity platforms that tend to enable larger amounts of funding are often not available in many emerging markets.

3. Payment systems impact platform choice.

Leading international crowdfunding platforms often set restrictions on who can launch campaigns and use payment systems that bar contributions from developing world contributors. Local-based platforms are better suited to engage the developing world, but have a much smaller pool of potential contributors.

4. Quality and quantity of contributor networks are key.

Entrepreneurs should spend a significant amount of time building a contact base that will contribute capital and promote the campaign. In addition, entrepreneurs who can “pre-raise” funds from their existing networks before a campaign goes live stand a better chance of meeting their fundraising goals.

5. Entrepreneurs should tap into complementary resources and organizations to increase their likelihood of success.

Business incubators and mentors can be essential sources of information and support for first-time crowdfunders. Matching funds have proven to be an effective tool to incentivize local contributors to channel their funds through online platforms.

6. Crowdfunding can have non-monetary benefits.

In addition to capital, crowdfunding helped some businesses increase credibility and market awareness, which sometimes resulted in partnerships, sales or investment. Entrepreneurs even used feedback from contributors to refine their products or business models.

While the six lessons above should serve as a practical guide for entrepreneurs looking to utilize crowdfunding, the lessons also indicate a number of potential actions for improving any crowdfunding ecosystem.

 

“Crowdfunding in Emerging Markets: Lessons from East African Startups.” 2015. Washington, DC: The World Bank Group

 

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Categories: Entrepreneurship and Small Business

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