Crowdfunding.. does anyone understand it?

It occurred to me that although I had heard the terms crowdsourcing and crowdfunding, that I really had no clue what it meant beyond group buying. Whilst the interpreted meaning might not be far off the truth of matter the "group buying" concept hardly does the philosophy justice.

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Wikipedia says: "Crowdfunding...describes the collective cooperation, attention and trust by people who network and pool their money and other resources together, usually via the Internet, to support efforts initiated by other people or organizations."

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Firstly, that means its not necessarily just about money. It is, however, much easier to pool money than it is to pool other resources like office space, development skills, PR skills, mentoring, etc. The platforms don't really exist on a broad scale (Feel free to disagree - comments welcome). And by sourcing money you are able to source the other resources according to your own business's order of priority. Whats the use of getting free PR but not having boardroom space to run your classroom-based training business? So, in my head, it makes sense for crowdsourcing to be about money.

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Zoe-X, a CTEC winner in the Idea stage for 2012, recently did a crowdsource gig on Crowdinvest to raise R700k in chunks of R700 per share. It is one of the very first deals that crowdinvest put up on their site and is still running. Thus far 28 of the 1000 shares have been crowdsourced. So we have a winning idea on one hand... and a relatively slow fundraising effort via the crowdsourcing platform on the other. We are new to this type of business in SA so I guess the pace of share subscription is to be expected. 

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Lets be clear on this one: you cannot afford to NOT read the Terms and Conditions of a site like this. Its a very legally binding agreement and there are rights that you cannot invoke e.g. reliance on the information provided on the website even if it results in you putting money down. One of the first terms they list is that they are not Financial Service Providers as defined by the Act. Good to know. But that doesn't mean it isn't a good deal! Here's why...

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Crowdsourcing is based on a simple truth: if enough people contribute enough money that they can afford to lose and will not be missing any sleep over the growth or loss of their investment, then its a cheap source of capital for a startup. 

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And the more startups that make good on their promise to crowdsourced investors the faster and more liquid the market will be. It has its dangers but hey, R700 doesn't buy very much these days and a promised 10x return is potentially better than a JSE-listed share that promises nothing more than an occasional dividend. And there's the offer of a share buyback at the end of the 5yrs. Not bad. Not bad at all. 

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So the main question is, how is this being marketed? Crowdsourcing I mean. If the team at Crowdinvest doesn't hit the road and start marketing their site broader than the developer market then there's little chance of it taking off. (I'm sure they are) But this is an idea that deserves media coverage. It probably also deserves more support in terms of ideas being listed from the Startup Community. 

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Our main risk as entrepreneurs is that there is ZERO protection of your intellectual property. If you put it out there for consumption prepare to have it be consumed by unauthorised organisations. (sorry, my founder mentality kicked in just there) Much better to have your idea formalised and somewhat in the process of being developed or protected than to go out there totally nude. 

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In closing, lets look at Pebblewatch. Read the Crowdfunding article if you have time. 

Rejected By VCs, Pebble Watch Raises $3.8M on Kickstarter.

Enough said.

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Comment by Juanita Jacobs on May 4, 2012 at 14:00

Cool post!  I just stumbled upon a new Crowd Funding initiative and just chatted to them on the phone...check out their Facebook page... http://www.facebook.com/iubuntufunding


As an entrepreneur I'm super excited about this taking off in SA.  When this topic was raised at Cape Town Entrepreneur Week last year one of the financial peeps in the know stated it wasn't yet possible in SA due to it contravening some of the financial / banking laws in SA.  However when I chatted to Craig Haupt (iBuntu) now it seems there are indeed legitimate, legal ways to make it work.  They're going to need to raise awareness now and start creating interest to get this huge big wheel in motion.  

Comment by Alistair Petersen on May 1, 2012 at 7:18

Crowdinvest media coverage .... click here.

Comment by Alistair Petersen on April 30, 2012 at 15:04

So this is more like a stokvel :) for various projects? I clicked through to one of the projects and it had spreadsheets and projections attached. They could only be perused if you created a user account and therefore became part of the ecosystem whether you decided to transact or not. 

Comment by Dirk de Vos on April 30, 2012 at 14:34

Oops, last line ought to have been deleted.

Comment by Dirk de Vos on April 30, 2012 at 13:40

Hey Alistair, thanks for the link to crowdinvest.co.za. I was unaware of them.  I had a brief look at the site and noted a few interesting things. On the positive side, they got legal advice.  They have an interesting distinction in the mechanism between most of the commercial assets (including notably "profit share") and business equity. For the most part, investors participate via a special purpose vehicle (SPV) (its legal nature is not disclosed but it islikely an investment trust of some sort) whereas business equity requires the investee to re-organise the target company to accommodate the investors wishing to participate directly - that part of their website is not that clear. The details of the SPV would be important for the purposes of the 10% return on investment requirement because trusts have a different tax treatment particularly as it relates to capital gains tax. 

The negative side, say compared to Kickstarter, they have to lay low and not be seen to be soliciting investors. The question is whether they can create an "ecoysystem of investors and investees. But they cannot really access social media or do any marketing as such and they probably need people like you (you mention clearly that you have no involvement) or other unconnected third parties to "spread the word". Some of the senior lawyers at ENS who were not alowed to solicit legal work either may have passed on a few ideas. Maybe I have done a little to help them out here? ;-)  If so, they deserve it....

but on the negative side, they appear to be hamstrung by the regulations mentioned in my previous post.  Crowdfunding of this nature probably

Comment by Alistair Petersen on April 30, 2012 at 11:59

Thanks Dirk! Thats some great commentary there. Its not really commentary.. its fact. :) Apparently crowdinvest.co.za did some legal work with ENS to jump some of the hurdles but I'm not familiar with which hoops they cleared and which they might not have gotten over. Would be very interesting to find out. Check out one of the deals on their site and give us another opinion on Silicon Cape please. (I'm in no way involved in crowdinvest by the way. thought I should mention that.)

Comment by Dirk de Vos on April 30, 2012 at 11:53

Crowdfunding appears to have got more traction recently with the passing in the USA of their JOBS Act. Effectively, as I understand it, the JOBS Act relaxes those rules or provisions in the corporate/company/securities legislation dealing with offers to the general public.  In general terms, in order to source funding from the general public, you need to have a full prospectus and the required disclosures and be a public company (i.e. ABC Ltd) as opposed to a private company (ABC (Pty) Ltd). The purpose of the rules is to protect the general publics' savings from scams.  The JOBS Act relaxes these rules to some extent - allowing small companies to remain operating as if they were private companies but still do crowdfunding. The difference now is that crowdsourcing is easier because of social media and the ability to get ideas out there.

In South Africa, the old Companies Act, limited the number of shareholders in private companies to 50 and required specific limitations on offers to the public.  The New Companies Act deals with the same subject matter differently (in Chapter 4 but it comes down to the same thing: Crowdfunding in SA is therefore, strictly speaking, illegal.

Still, should initiatives like Pebble Watch be successful, it may provide the basis for something similar here. There would need to be one or two additional steps though. Our putative crowdfunder, using social media, would either need to be compliant with the new Companies Act -effectively being a public company or register as a collective investment scheme in terms of the Investment Schemes Control Act. There would be additional FSB registration requirements also. In my view, for this to work though, the 2/20 rule (2% annual management fee plus 20% of the returns over a given hurdle rate) would need to be revisited.

My 2c worth is that decent dealflow is hard to access in SA. 

Comment by Alistair Petersen on April 24, 2012 at 19:14

100% correct Mark - there's not enough broadcasting about crowdfunding. I think it would go further if people could tell their friends via social network sharing. There could be regulatory issues around this though in terms of enticing people to join your (Ponzi-esque) scheme. 


Thats not to say the deal is legitimate, but there are guidelines for what you are allowed to say to people in terms of advising on an investment. Certainly there can be no harm in saying "I bought this!".. but it would need to stop before telling people "You should buy too!"

Comment by Mark Koekemoer on April 24, 2012 at 16:40

Hi Alistair, good post – I have to agree I have not seen much media coverage or online. Perhaps the social and sharing (hey buddy - look what I've invested in!) is the best way for them to gain traffic?

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