Why crowd funding is not yet popular in East Africa

Saturday September 8 2012

By Pauline Muthigani Special Correspondent

Technology firms are increasingly turning to crowd financing to fund their businesses, but it is yet to becoming a big hit in East Africa.

The concept, also referred to as equity crowd-funding is a collective effort by individuals who network and pool their resources, usually via the Internet to support efforts initiated by other people or organisations.

Crowdfunding is used in support of a variety of activities, including philanthropic activities, political campaigns and scientific research.

Thousands of East Africans participate in crowd fundraising drives every day to pay for everything from weddings to school fees to community rehabilitation. It is only recently that mobile technologies have been used to reduce costs and automate manual processes.  

Crowdfunding also refer to the funding of a company by selling small amounts of equity to many investors.

This form of crowd funding has recently received attention from policymakers in the United States with direct mention in the legislation that allows for a wider pool of small investors with fewer restrictions.

The Act was signed into law by President Obama on April 5, 2012. In the US, crowd funding is gaining viral popularity.

Kickstarter, a New York City–based website founded to support creative ventures, has become a force in financing technology startups.

Entrepreneurs have used the site to raise hundreds of thousands of dollars at a time to develop and produce products.

This crowdfunding model offers an alternative to traditional means of raising startup funds for some types of businesses, such as Web or design firms.

Startups keep their equity, maintain full control over strategy, and gain a committed community of early adopters to boot.

While crowd-funding ventures ask for relatively small amounts, several have even exceeded the $1 million mark.

One such start up raised over $3 million to develop a video game. That’s well beyond the typical angel stake, which generally tops out at $600,000, and into the realm of the typical venture capital infusion.

Kickstarter users pledged nearly $99.3 million for projects in 2011, an amount roughly equivalent to 10 per cent of all seed investment in the United States.

For projects that do hit their target, donors receive a variety of rewards, including thank-you notes, products, or even elaborate packages that might include a visit to the creators’ place of work.

If crowdfunding sites start offering equity shares, it will make a few dozen Venture Capital firms disappear.

Many crowdfunding companies will allow startups to raise between $1,000 and $1,000,000 for their projects, while also publicising their ideas across multiple web platforms.

The companies do not ask for any fees for the projects to be submitted on the platform though a 10 per cent fee is applied to funded projects, which means that only successfully funded projects generate revenue for the platform.

The new crowdfunding were started because inventors were tired of looking for an investor for their projects.