With the IDC willing to look at funding applications of R1 million upwards (lately it seems they prefer projects requiring R10 million or more), what options are available for manufacturing startups requiring less funds to start production and get their product out into the marketplace?
I recently read an article on the Ghanian startup, Kadi Energy, using crowdfunding to successfully fund the manufacturing of their Ray 20 solar mobile charger. This made me wonder if South Africans are aware of the potential of crowdfunding as a source for raising capital.
What is Crowdunding?
Crowdfunding is the practice of funding a project or venture by raising many small amounts of money from a large number of people, typically via the Internet. Instead of traditional investors, crowdfunding campaigns are funded by the general public. Typically, most successful projects receive about 25-40% of their revenue from their first, second and third degree of connections. This could include friends, family, work acquaintances, or anyone that the owner is connected to, including their second and third degree connections. Once a project has seen some traction, unrelated consumers start coming out of the woodwork to support campaigns they believe in.
There are two main models for crowd-based financing today. There’s rewards-based crowd-funding where people give money to get rewards then you have equity-based crowd-funding where investors invest capital. Rewards-based crowdfunding can work well as a step towards de-risking customer demand and building a community of early adopters without giving up equity in the business. If you’re looking for savvy investors to provide feedback and connections that you can use to shape your trajectory, equity-based crowd-funding may be a good choice. You are more likely to find people who are specialized and knowledgeable about particular industries and sectors.
People are really interested in the companies they fund and how to help them succeed.
What are the risks?
There are a few concerns when it comes to manufacturers wishing to pursue crowdfunding:
- Once you’ve announced your new product idea online, the world of copycats may rear its head to clone your innovation. Unless you have intellectual property protection for your design, you may find yourself racing the clock to beat copycat competitors. To compete effectively in the market, you’ll need additional strategic advantages – not just funding for the manufacture and distribution of your product.
- Product designers with limited manufacturing experience may encounter headaches that transform crowdfunding success into disaster. A design or homemade prototype is just the first step – substantial investment in producibility, vender selection, methods and process, tooling, and quality control is also required to ensure that you can produce a quality product on schedule.
- If your crowdfunding project far exceeds expectations, you may swiftly find yourself a victim of your own success. If you won’t be manufacturing your product yourself, the vendors you selected for production may be unable to meet a dramatically larger production demand, or production of such a scale may require a much longer period of time than you promised to pre-sale buyers.
As a nation, we are quite conservative and risk-averse with our approach to business. Many potential entrepreneurs would rather let go of an innovative idea than to risk taking out a business loan. Crowdfunding does not remove the risks involved with starting your own business, but it provides a good gauge to the market interest in your idea.
Platforms like Kickstarter and Indiegogo have become very popular overseas, especially Europe and the US, to fund entrepreneurs and startups with valid business cases. Here in South Africa, we have sites like Thundafind, Startme and the Angel Investment Network injecting crowdfunding into the local economy.
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