Global Money Week, exploring crowdfunding

The Global Money Week is a campaign that aims to improve financial literacy amongst young people. This year’s edition is running under the theme, protect your money, secure your future and I decided to explore the concept of crowdfunding and its applicability in the Zimbabwean context.

The concept of crowdfunding is seemingly simple yet ground-breaking and globally billions of dollars have been raised utilising this framework. Over US$35 billion has been raised in the past fifteen years on GoFundMe and Kickstarter alone, two of the biggest crowdfunding platforms.

Crowdfunding is whereby multiple investors contribute towards the financing of an idea, a project or a company usually facilitated by utilising a technological platform. The contributions or investments by individuals might not be significant, but collectively pooling the resources then makes a huge impact.

Usually, participants in a crowdfunding venture have a motive which is more than just profit and believe in the project that they deploy resources. Projects like building a school or hospital in a remote village usually manage to attract donations if the story is well-curated and convincing enough. There is typically an influential figure in such campaigns, who persuades or motivates the crowd to deploy resources into the crowdfunding venture.

Broadly speaking, there are three types of crowdfunding ventures i.e. debt-based, equity-based and donation-based crowdsourcing. We have briefly touched on the donation-based one but for entrepreneurs and start-ups the focus is mainly on the debt or loan-based and the equity or reward-based based.

The loan-based structure is pretty straightforward, as the contributors in the crowdfunding campaign expect a promised return on the idea or project and pretty much follow investments in your typical fixed-income instruments. Usually, companies that have cashflows that are able to sustain paying the interest on loans also have alternative ways to raise funding, which is why the loan-based structure is not very prevalent.

The equity-based is more common and generally suits the start-ups or ideas, that might be pre-revenue. It is also associated with greater risk and return characteristics and this article will focus mainly on that type of crowdfunding and explore if it works out in Zimbabwe.

Currently, in Zimbabwe, crowdfunding is not regulated under the Collective Investment Schemes Act, but one would imagine that would be its perfect fit. Collect Investments employ the same concept as crowdfunding, which is pooling resources into a specific investment. However, the Reserve Bank of Zimbabwe under the Fintech Regulatory Sandbox in 2021 listed equity crowdfunding under the innovations eligible to be monitored.

Ever since platforms like Lloyd Crowdfunding have emerged. This platform is available in Zimbabwe and is for equity crowdfunding. It is open for SMEs looking to raise funding and investors can put from US$1,000 to US$500,00. There is a $200 application fee plus a 1% custodian fee and a 2% deposit fee for loan projects.

However, based on the website of the platform, there seems to be little appetite from the public to fund the projects. There are some listed investment opportunities, some of which are actually approaching their deadline but with very little investment. This gets one asking whether crowdfunding actually works.

The success story regarding crowdfunding relates to Nhimbe Farm, in Mashonaland East. In 2021 through the help of The Sun Exchange, which is a South African company in the solar space, Nhimbe Farm in Marondera managed to raise $1.4million for its solar projects using crowdsourcing platforms for a 510kW solar project.  However, not many companies and projects have been able to replicate this, especially without external support.

We have gathered that to launch a successful crowdfunding campaign, regardless of which type the cause must be very clear. This is made possible by crafting a very coherent story that satisfies people to participate in crowdfunding, and this might include articulating the vision and pictorial simulations of what you are trying to achieve.

In addition, it will also be critical to have a targeted marketing campaign. Although the idea behind crowdfunding is to pool resources from many small participants, it is also important to have a targeted market that contributes a significant portion of the required money before the public jumps on, and in many cases, this then lures the public to get on. This reduces the probability of failure of the project should it fail to raise the minimum crowdfunding required.

Surprisingly enough in Zimbabwe, multiple cases of scams in the form of pyramid schemes have been recorded and at the same time, crowdfunding failed to pool the resources. The two are comparable except for the fact that crowdfunding has genuine intent whereas pyramid schemes are created in a way that they will eventually collapse. Perhaps the key lesson from why pyramid schemes are successful is to do with their marketing and outreach and pyramid schemes were helped by peer-to-peer marketing.

A successful equity crowdfunding also needs to simplify the technical jargon as much as possible, such that their story is clear to everyone. The platform on which the crowdsourcing campaign will be housed on, is very critical in determining whether the campaign is successful or not. A platform that is known and has many registered participants has higher chances as opposed to new platforms that are still to be known.

Zimbabwe is a bit behind in attracting meaningful capital through crowdfunding, but it does not mean that it is impossible. A concerted effort from the private players and regulators regarding awareness and education will go a long way in creating a conducive environment for crowdfunding.