By Antony Mutunga
As it is elsewhere, unemployment is a big problem in Kenya. Millions remain jobless despite having the right qualifications required to land a job. As a consequence, many people, especially the youth, who make up a large portion of the population, live below the poverty line. And to escape this fate, some venture into entrepreneurship.
One problem, however, stands in the way – initial capital. There are colossal bottlenecks to acquiring the requisite wherewithal in a country were shylocks and banks conduct brisk business charging unusually high interest rates.
The passing of the interest rate cap into law in 2016 was meant to change this but instead it made matters worse as banks put up strict measures that make it difficult for borrowers, especially individuals and SMEs, which are considered too risky, to qualify for loans. Kenyan entrepreneurs have especially been left stranded as they lack enough options to raise capital.
Marion Moon, founder of Wanda Organic, is one of these entrepreneurs. She says it has been difficult for many businesses to stay afloat, as banks will not give out loans. “Family and friends are what has kept us afloat,” she offers.
To survive the tough times, there has been a growing need to find alternative avenues to raise capital.
Crowdfunding – the practice of funding ones project through raising small amounts of money from a large group of people usually over the Internet – has been the rage in different parts of the world, but is just at its pioneer stages in Africa. What it does is to give entrepreneurs a chance to communicate with millions of potential funders who are each able to contribute a small amount.
For years, musicians, artists and non-profit organisations have used this method to raise money to complete their projects. However, it has now moved to incorporate profit-making businesses, mostly start-ups. Because we live in a digital era, the idea of doing fundraisers online using crowdfunding platforms often reaches big audiences thus its popularity. Many have come to refer to it as the social media version of fundraising.
Crowdfunding platforms act as intermediaries and help entrepreneurs to save up time and money while connecting to the masses. This is evident in the fact such sites eliminate the expenses that the entrepreneur would otherwise incur looking for potential investors. Instead, they provide him/her a single platform where they can showcase and pitch their ideas. Examples of these platforms include Kickstarter, GoFundMe, CrowdFunder, Funding Circle and M-Changa.
However, before an entrepreneur ventures into crowdfunding it is important for them to understand that this model takes different forms.
First off is the donation-based crowdfunding whereby people contribute because they believe in a cause and expect no reward or returns in exchange. Basically those who contribute in this model usually do it because they feel strongly towards the entrepreneur’s idea. This is really useful in connecting people who have a common goal.
In Kenya, this form of fundraising has traditionally and conventionally taken the form of harambees. Translating to “pulling together”, harambee has been helpful to the Kenyan community in various situations, including in raising school fees, settling medical bills, responding to crises, and so on.
However, moving the idea online has seen the birth of digital harambee creating business models such as M-Changa, the first crowdfunding platform in the country, which was created in 2012 and has so far recorded over 50,000 customer interactions.
The second form is equity-based crowdfunding whereby the entrepreneur shares their idea on a crowdfunding platform and in order to attract contributors they promise that those who invest will be awarded shares in the company, thus according them partial ownership. As a result, the investors receive a financial return on their investment and a share of the profits of the company in terms of dividend.
While this second option is not so common in Kenya, it could be helpful especially to start-ups as they would incur a minimum start-up cost as compared to when dealing with traditional methods of funding.
According to Kyai Mullei, co-founder of M-Changa, traditional fundraising is an increasingly high cost and high hassle option. On the other hand, when it comes to crowdfunding the only cost incurred is the percentage that goes to the crowdfunding platform. In addition, entrepreneurs have access to the crowd (large pool of contributors), which they can utilise to get ideas and feedback, which could help in expanding the company.
Another form is credit-based crowdfunding, also referred to as crowd lending or peer-to-peer lending. Here, the contributors invest money into a company expecting to get it back in full with interest. It is quite similar to taking a loan from traditional forms of funding such as banks although, in this case the contributor acquires better returns in the long run and the entrepreneur gets a funding at a lower interest rate.
The last type is referred to as rewards-based crowdfunding. This is a form where entrepreneurs solicit financial contributions from the public over the Internet and in return they offer them rewards for their investment. For example, a client planning on starting a jewellery shop may offer bracelets as rewards to those that contribute.
In most cases, the rewards vary depending on how much one contributed; in other cases, the reward is uniform. As compared to debt and equity based crowdfunding, the reward-based model allows the entrepreneur to hold on to the equity and control of the company – and therefore all profits stay with them.
In 2016m according to a report by Statista, the value of funds raised through crowdfunding stood at $738.9 million (Sh74.3 billion). Even though the market is rising in developing countries, it still faces some challenges that cause it not to reach its full potential.
For starters, a majority of the entrepreneurs are usually afraid of pitching their ideas on crowdfunding platforms, as they fear wealthy investors who might hijack them to pass them as their own. Many miss out on this account.
As a solution, entrepreneurs have been advised to first register intellectual property rights to their ideas before they put them on online platforms. This way the entrepreneur is safe from losing intellectual property rights to wealthy investors.
Apart from this, a majority of contributors are also hesitant about crowdfunding as they are not certain of whether the entrepreneurs have the right motive, or whether they are just using the platform to acquire money from the public by false pretence. This eventually ends up affecting genuine entrepreneurs as well, as a large number of those who are online avoid the platforms in general thus leaving the entrepreneurs dry of investors.
It is important for the crowdfunding platforms to do thorough searches on the entrepreneurs as the law is very strict and clear that it criminalises those who try to obtain funds using false pretence. This is why the online platforms need to do their due diligence and assure that the entrepreneur’s information is factually correct so as to also assure the contributors that what they invest in is indeed true and correct.
The entrepreneurs also need to be careful of how they act on the crowdfunding platforms, and ensure that their ideas/concepts are well developed.
There is the threat of reputational risk if an entrepreneur is under prepared or if there are errors done, which would affect badly the project and the business as a whole.
If solutions to the several challenges it faces are successfully sought and implemented, crowdfunding would be widely accessible and beneficial to many budding entrepreneurs.
There is also a need to raise public awareness on not only the different types of crowdfunding but also on the requirements needed before one ventures into this financial model. If we hacked this, it could be the answer to Kenya’s credit shortage. (