CROWDFUNDING, an alternative model of raising funds online, is expected to gain momentum this year with Deloitte predicting that websites and companies that provide such a form of funding will raise $3bn this year, double the $1.5bn raised in 2011.
"Crowdfunding" provides an alternative way for entrepreneurs with innovative ideas to take advantage of the internet. Anyone can use the internet to publicise an idea to like-minded investors in a bid to bring that idea to fruition.
Deloitte says crowdfunding generally involves small contributions at the individual level. Although the top pledge packages can be more than $10,000, on average the individual contribution is likely to be less than $1,000 in almost every category, the company said in its latest report.
In April last year, the US bolstered this growing concept, by passing the Jumpstart Our Business Startups Act, which contains crowdfunding provisions to help entrepreneurs raise funds.
According to South Africa’s first equity crowd-sourced investment platform, Crowdinvest, in the past 17 years, crowdfunding globally has accounted for more than $4bn in funding to entrepreneurs, artists, designers and creators. This was more than four times what governments had provided to these same individuals and organisations.
International crowdfunding companies Kickstarter and Indiegogo have shown more than 100% growth over the past year, with Kickstarter-funded projects attracting about $200m in funding, according to Crowdinvest’s Anton Breytenbach.
Although crowd investment has shown substantial growth internationally in the past two years, with more than 100% growth year on year, South Africa has been reluctant to embrace it. While there is great interest in the concept, investors are not yet "getting their feet wet", says Mr Breytenbach. This was mainly because it was a new concept in the country and its success still had to be proven.
Further, investors were circumspect because of all the financial scams in South Africa in the past few years.
Mr Breytenbach says the Financial Services Board "is now doing an amazing job" at protecting the industry and this gives new entrants more credibility, and a sense of security to investors. "Our challenge and commitment is to show that it can work and that it will be very successful in stimulating economic growth and especially entrepreneurship."
Crowdinvest has registered more than 200 members since launching in November last year. It aims to have 10,000 active investors on its platform, with a total funding of R20m this year. It recently empowered a young entrepreneur in the media industry, through R5,000 crowd-sourced investing, to print and distribute his first newspaper, called New Day.
Mr Breytenbach says the paper is aimed at the informal Helderberg communities and the owner sold 1,000 copies thanks to the funding he received. "In total, six people contributed and look to receive a return on investment of around 5% in only two months."
Some critics have raised concerns about risks associated with crowdfunding.
Deloitte says some research suggests that crowdfunded "opportunities are a bigger risk than the traditional initial public offering". Further, the potential for the average investor to misunderstand or misinterpret the promises of an early-stage startup is higher than for an experienced, accredited investor.
Mr Breytenbach says Crowdinvest has both short-and long-term investments. But most would be medium to long-term.
"Investments are not speculation or a get-rich-quick method. They take time, but can offer substantial growth in personal wealth," Mr Breytenbach says. "The key to success is to diversify your portfolio over different sectors and investment instruments, based on risk and term, depending on your own risk aptitude."
Technology and entertainment sectors were most likely to attract crowd-sourced investment. "Companies in these sectors provide an excitement factor to investors, especially the young, savvy, working professionals," Mr Breytenbach says.
The growth of crowdfunding could have some spinoffs.
According to Deloitte, some crowd-funded projects raise funds for new technological devices and media content such as computer games, thus boosting growth in the technology and media sectors.
Crowdfunding portals themselves were likely to become a new type of internet portal.
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