NB Financial Health
Crowdfunding for Development: Recommendations vs. reality
Crowdfunding – think Kickstarter, Indiegogo or Kiva – is popular and growing. About a year ago, infoDev, a global innovation and entrepreneurship program in the Trade and Competitiveness Global Practice (where I work as a consultant), released a report titled “Crowdfunding’s Potential for the Developing World.” It explored what crowdfunding, on a larger scale, could mean for high-potential enterprises in developing countries. The study quantified for the first time the value of crowdfunding, estimating a global market of $96 billion by 2025 – 1.8 times today’s global venture capital industry. It outlined specific recommendations for policymakers and business accelerators that focus on high-growth entrepreneurs and innovative ways to provide access to finance.
Now, almost a year later, infoDev is seeing the first results of the pilots it is putting in place to test the viability of crowdfunding within its network of incubators. With the support of Crowdfund Capital Advisors, infoDev’s Kenya Climate Innovation Center (KCIC) is implementing the Crowdfund Investing Pilot, a project designed to mentor and train six carefully selected Kenyan startups on crowdfunding and online fundraising campaigns.
With the six entrepreneurs already working on their campaigns, it’s time to reflect on a few key recommendations of the report, to see how they compare to the reality of working with these entrepreneurs so far.
Recommendation 1: Make sure companies are ready to crowdfund. Identifying companies suitable for crowdfunding is key to the success of every support program. In order to “vet” businesses, it might be useful to employ a number of different methodologies, such as concept and marketing competitions, online surveys, and in-depth interviews with the candidate entrepreneurs.
Reality: In Kenya, infoDev devised the Crowdfunding Readiness Survey to screen companies by interest, capacity and capability for participation in the pilot. This selection mechanism examined the profile of the company’s management team, legal status, maturity, business model (including value chain), current accounts, capital needs, crowdfunding aspirations, and social media presence.
The difficult part was to make a selection in a standardized way. The selection process could only provide the selection panel with a “raw” indication of the entrepreneurs’ readiness and was necessarily augmented by additional evaluation methods. Out of the 73 companies that are currently working with the KCIC, 16 were invited to a pitch competition. By observing other factors, such as personality, presentation and communication skills, the project team was able to make a more accurate decision on which entrepreneurs could be successful crowdfunders. The process was analogous to the investment decision of Silicon Valley super angel investor Ron Conway, who famously said: “We invest in people first.”
Recommendation 2: Partner with the right platform. There are four types of crowdfunding platforms: Donation, Perks/Pre-order, Debt and Equity. To launch an effective campaign, the project needs a systematic method for selecting the appropriate platforms for each identified company.
Reality: in Kenya, given the infancy of the crowdfunding market, it was crucial to identify platforms with a critical mass of active funders. Out goes Kickstarter: Project backers that register on Kickstarter may hail from anywhere across the globe, but project originators must be registered in the U.S., U.K., Canada, Australia, New Zealand, the Netherlands, Denmark, Ireland, Norway or Sweden.
Next, our team established which platforms posed the least legal and regulatory risk in Kenya. The team relied upon local legal experts for an analysis of the Kenyan securities regulatory environment and determined that although equity crowdfunding might be permissible within the current framework, it posed too much legal risk to the outcome of the pilot.
Lastly, the team considered which platforms would best complement the business models of the pilot companies. Because many of the businesses sell their products directly to consumers, the “pre-sale” model offered by Indiegogo was a very interesting choice. Moreover, many of these consumer products target underserved African communities and therefore could be best supported with the addition of crowdfunded consumer finance, offered for example by platforms like Kiva.
Recommendation 3: Learn from previous experiences. Every country, every company, every product, every community of users is different. There is no perfect formula for designing and running a successful crowdfunding campaign. Learning by trial and error is very important, and organizations that support crowdfunding play a critical role in capturing, analyzing and spreading this knowledge.
Reality: The KCIC is capturing knowledge around all aspects of the crowdfunding pilot, including company selection, training materials and mentorship techniques, and will conduct ongoing data capture and analytics on the crowdfunding campaigns while they are active. The data captured by the center on the six winning companies and their campaigns – whether or not they turn out to be successful – will be a stepping stone to a better understanding of the challenges and opportunities of crowdfunding in the country.
Development organizations like the World Bank, governments, venture funds, and NGOs should continue to study crowdfunding to better understand its potential and determine how it can provide innovative solutions to the “last-mile funding problem” faced by many start-up companies in the developing world.
Editor’s note: This post was originally published on the World Bank’s Private Sector Development blog. It is cross-posted with permission.
Sam Raymond is a Consultant with infoDev’s Access to Finance Program.