Crowdfunding's Potential in South Africa

Crowdfunding’s Potential in South Africa

Research Report

A research report submitted to The Graduate School of Business, University of Cape

Town, in partial fulfillment of the requirements for the degree of Master of Business

Administration 2013

Andrei Horga

Full Time 2013

Supervisor: Dr. Chipo Mlambo

II

ACKNOWLEDGEMENTS

First and foremost, thank you to my family – Sorina, Calin, Alina, Mariana, Nelu and

Duku for always being there for me. Thank you to my supervisor, Dr. Chipo Mlambo, for

the helpful suggestions on how to improve this report. Thank you to Patrick and Andrea,

your help was instrumental in creating this research report. Thank you to everyone I

interviewed – it was a pleasure. Thank you to all my classmates for the kindness and

support throughout this whole year; it’s been an unforgettable year. Special thanks to

Fabian, Vittoria, and Tommy for their logistical support these past few weeks. And last

but certainly not least, thank you to Madiba for everything you’ve given to this world - I

dedicate this report in your memory.

III

ABSTRACT

South Africa has one of the highest unemployment rates in the world. Small and Medium

Enterprise (SME) support from government and traditional investors has failed to create

suitable levels of employment for the country. A qualitative, inductive investigation into

the potential online crowdfunding has for creating successful businesses and employment

was conducted over the period of one month in a current South African context. Barriers

to use, government’s role in crowdfunding, and the reason for Crowdfunding’s past

failures in South Africa were investigated. Nineteen semi-structured interviews were

conducted with actors in the crowdfunding world, of which twelve were with local Cape

Town projects using online crowdfunding for the first time, via a local crowdfunding

platform. Participants described various motivations on why they used crowdfunding,

barriers to using it successfully, successful campaigns, and opinions on what role the

government should have in crowdfunding. A majority of participants stated that the

mentorship provided to them through the partnering crowdfunding platform was key to

running a successful crowdfunding campaign. A majority stated government should have

an active role in crowdfunding, via promoting and investing in it. Various motivations for

using crowdfunding were given, with financial need and marketing being the top choices.

Locally crowdfunded businesses and projects were found to increase local employment

opportunities, and create new positions. Government partnership with local crowdfunding

platforms, and match funding, seems to be a likely probability in the future after the

success shown by these projects.

IV

DECLARATION

1) I know that plagiarism is wrong. Plagiarism is to use another’s work and pretend

that it is one’s own.

2) I have used the American Psychological Association (APA) convention for

citation and referencing. Each contribution to, and quotation in, this research

report from the works of other people has been attributed, and has been cited and

referenced.

3) This research report is my own work.

4) I have not allowed, and will not allow, anyone to copy my work with the intention

of passing it off as his or her own work.

5) I acknowledge that copying someone else’s assignment or essay, or part of it, is

wrong, and declare that this is my own work.

Signed:

Name: Dan Andrei Horga

1

TABLE OF CONTENTS

Acknowledgements ............................................................................................................. II

Abstract ............................................................................................................................. III

Table of Contents ................................................................................................................ 1

Table of Figures .................................................................................................................. 3

Table of Tables ................................................................................................................... 5

SECTION 1: Introduction ................................................................................................ 6

1.1 Research Area ........................................................................................................ 6

1.2 Purpose and Significance ....................................................................................... 9

1.3 Research Question and Scope .............................................................................. 11

1.4 Limitations of the Study....................................................................................... 12

1.6 Assumptions ......................................................................................................... 12

1.7 Research Ethics ................................................................................................... 13

SECTION 2: Literature Review ....................................................................................... 14

2.1 Introduction ......................................................................................................... 14

2.2 Background Discussion ..................................................................................... 14

2.2.1 Crowdsourcing’s Beginnings ........................................................................ 14

2.2.3 How Will Changes in the Law Enable an Equity Crowdfunding Model to

Operate? ........................................................................................................................ 21

2.2.4 Economic Situation in South Africa and Crowdfunding’s Potential in Improving

It. ................................................................................................................................... 25

2.3 Conclusion .......................................................................................................... 31

SECTION 3: Research Methodology .............................................................................. 33

3.1 Research Approach & Strategy ........................................................................... 33

3.2 Research Design, Data Collection Methods, and Research Instruments ............ 35

3.3 Population and Sampling .................................................................................... 37

3.4 Data Analysis ...................................................................................................... 38

SECTION 4: Research findings, analysis and discussion ............................................... 40

4.1 Research Findings, Analysis, & Discussion ........................................................... 40

4.1.1 Interview Groupings ........................................................................................ 40

2

4.2 Themes .................................................................................................................... 48

4.2.1 Barriers and Accessibility ................................................................................ 48

4.2.1.1 Alternative Financing ................................................................................ 51

4.2.1.3 Concerns ....................................................................................................... 58

4.2.2 Government ...................................................................................................... 63

4.2.3 Planning and Support ....................................................................................... 69

4.2.3.1 Crowdfunding Success in South Africa and Mentorship .......................... 72

4.2.4 Social Networks ............................................................................................... 77

4.2.4.1 Activating the Crowd ................................................................................ 78

4.2.4.2 Linking Communities ............................................................................... 79

4.2.4.3 Community ............................................................................................... 81

4.2.5 The Why and the How of Crowdfunding ........................................................ 83

4.2.5.1 Marketing .................................................................................................. 84

4.2.5.2 Financial Need .......................................................................................... 85

4.2.5.3 Validation .................................................................................................. 86

4.2.5.4 Traditional Crowdfunding ........................................................................ 89

4.3 Research Criteria Evaluation .................................................................................. 91

4.3.1 Credibility ........................................................................................................ 91

4.3.2 Transferability .................................................................................................. 91

4.3.3 Dependability ................................................................................................... 92

4.3.4 Confirmability .................................................................................................. 92

4.4 Research Limitations .............................................................................................. 93

SECTION 5: Research Conclusions ................................................................................. 95

SECTION 6: Future Research Directions ....................................................................... 101

References ....................................................................................................................... 102

Appendix 1: Six interview questions for entrepreneurs .................................................. 105

Appendix 2: table of codes and how they relate to themes ............................................. 106

Appendix 3: Transcribed interviews .................................. Error! Bookmark not defined.

Appendix 4: Complete Research Findings ..................................................................... 111

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TABLE OF FIGURES

Figure 1: Crowdfunding Platform Growth 2007-2012 ....................................................... 8

Figure 2: Total Capital Raised in Thousands on Kickstarter by successful projects, 2009-

2012........................................................................................................................... 17

Figure 3: Types of Crowdfunding Ventures ..................................................................... 18

Figure 4: The different Models of Crowdfunding Presently Available.. .......................... 20

Figure 5: Number of Private Equity Crowdfunding (PEC) Platforms in Existence. ........ 21

Figure 6: Employment Versus Business Size in South Africa ......................................... 26

Figure 7 :Total Early Stage Entrepreneurial Activity, 2010 ............................................. 27

Figure 8: Market Potential for Crowdfunding Across the Regions .................................. 29

Figure 9: Four Elements of a Crowdfunding Investing Ecosystem. ................................. 30

Figure 10: Codes Comprising Barriers and Accessibility Theme. ................................... 48

Figure 11: Breakdown of Alternative Financing Subtheme Into Codes. .......................... 51

Figure 12: Was Alternative Financings Sought Out Before Turning to Crowdfunding? . 52

Figure 13: Barriers Sub-theme Broken Down into Corresponding Codes ....................... 53

Figure 14: A Breakdown of How Many Times Each Barrier was Mentioned Through All

Interviews .................................................................................................................. 54

Figure 15: Concerns Sub-theme Broken Down into Codes .............................................. 58

Figure 16: Concerns Cited, Grouped by the Number of Interviewees that Listed a

Concern When Speaking About Crowdfunding ....................................................... 59

Figure 17: Are People Concerned When Paying Online? Results Listed by Number of

Interviewees that Stated Each Answer ...................................................................... 60

Figure 18: Government Theme and Its Subthemes and Codes ......................................... 63

Figure 19: Government’s Role in Crowdfunding Subtheme, Broken Down by the Number

of Interviewees that Listed Each Role ...................................................................... 64

Figure 20: Planning and Support Theme Broken Down into Sub-themes and Codes. ..... 69

Figure 21: FundFind Success Rate Out of 23 Total Projects. ........................................... 73

Figure 22: StartMe’s Success Rate, 46 Total Projects ...................................................... 73

Figure 23: PlatformName’s Success Rate, 27 total projects. ............................................ 74

Figure 24: Social Networks Theme Broken Down into Sub-themes and Codes .............. 77

4

Figure 25: The Why & How of Crowdfunding Theme Broken Down into Sub-themes and

Codes......................................................................................................................... 83

Figure 26: Reasons for Crowdfunding, and Number of Interviewees that Chose Each. .. 84

Figure 27: Do You Believe Crowdfunding Will Lead to Further Investment Interest in

Your Business? Results Broken Down by Number of Interviewees. ....................... 88

Figure 28: Reasons For Crowdfunding, and Number of Interviewees That Chose Each. 97

Figure 29: A Breakdown of How Many Times Each Barrier was Mentioned Through all

Interviews. ................................................................................................................. 98

Figure 30: Government’s Role in Crowdfunding Sub-theme, Broken Down by the

Number of Interviewees that Listed Each Role. ....................................................... 99

5

TABLE OF TABLES

Table 1: Anonymous interview subjects and their background. Original. ....................... 40

Table 2: Interview length. location, and format. Original. ............................................... 43

Table 3: Coding of Themes. Original ............................................................................... 46

6

SECTION 1: INTRODUCTION

1.1 Research Area

Micro, Small and Medium Enterprises (MSMEs) account for over 90% of enterprises in

the whole world, and are a critical source of output and employment. They employee

33% of formal sector workers in low-income countries, and 62% of formal workers in

high-income countries. Further more, many developing countries have large informal

economies, and the real number of employees working at MSME’s is significantly higher

in these emerging markets (Vandenberg, 2009).

Traditionally, early startup businesses only had access to limited sources of seed funds to

start and expand their businesses with. These were usually personal savings, equity home

loans, credit cards, friends and family members, angel investors, and venture capitalists (

(Agrawal, Catalini, & Goldfarb, 2013). Entrepreneurs in emerging markets face further

challenges such as the inability to obtain bank loans due to no formal banking history or

lack of collateral (Demirguc-Kunt and Peria, 2008). However, with the creation of

Sellaband in 2006, a new method of raising seed capital was created – crowdfunding.

Crowdfunding is defined as “an open call, essentially through the Internet, for the

provision of financial resources either in form of donations (without rewards) or in ex-

change for some form of reward and/or voting rights in order to support initiatives for

specific purposes" (Lambert & Schwienbacher, 2010).

It comes out of the historically older crowdsourcing movement, which itself is defined as

“the act of taking a job traditionally performed by a designated agent (usually an

employee) and outsourcing it to an undefined, generally large group of people in the form

of an open call” (Howe, 2008). The generally accepted varieties of crowdsourcing are:

crowdfunding, crowd voting, crowdlending, microwork, creative crowdsourcing, wisdom

of the crowd, and inducement prize contests (Howe, 2008).

7

Crowdsourcing is not a new concept – for instance the Statue of Liberty was

crowdsourced in the 1884 by over 100,000 American citizens. Only $150,000 (all values

are USD) dollars were allocated for building the pedestal when the statue was supposed

to arrive. Joseph Pulitzer, through his newspaper, asked for small donations from the

American public to help come up with the funds. Over 100,000 Americans donated on

average less than a dollar (Hemer, 2011). The Oxford English Dictionary is another

example – it’s first edition was completed by asking the English public to help identify

all the English words in usage, and to come up with a definition and example (Lanxon,

2011). A modern equivalent is Wikipedia, where members of the public work together to

create encyclopedic articles on a broad range of topics.

Already today, crowdfunding is an acceptable source of start-up funding. Kickstarter, a

crowdfunding platform, has supplied 664 million dollars from global funders to over

48,000 successful projects (Kickstarter, 2013). Over 60% of donors are more than 5000

km away from the project they fund – there is no requirement that the funder be a citizen

of the country the business is based in (Agrawal, Catalini, & Goldfarb, 2011). The

increase in these crowdfunding sites is startling; from 2006 to 2012 there has been a

557% growth, from a handful of crowdfunding platforms more than 800 sites now

operating – the figure below illustrates this (Freitas & Amado, 2013). Worldwide, $2.7

billion dollars was raised through crowdfunding in 2012, an 81% increase year on year.

Out of this, $1.6 Billion was raised in North America. This year, $5.1 billion is expected

to be raised, with no signs of a slowdown (Drake, 2012).

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Figure 1: Crowdfunding Platform Growth 2007-2012. Reprinted from “Crowdfunding in urban planning  : Opportunities and Obstacles” by Freitas, C. De, & Amado, J , 2013.

Sites such as Kickstarter and IndieGoGo work on a donation model. That is to say, the

funders (or public) pledge small amounts of money to the creator (or company) in return

for a gift, which in many cases is the actual finished product – when it is complete. These

sites work on different models – the most popular take an all or nothing approach,

meaning that if the creator fails to reach his monetary funding goal, he or she gets

nothing. Other sites will dispense whatever amount of money is pledged to the creator,

even if it is below the target.

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1.2 Purpose and Significance

This is an exploratory research report that attempts to understand why crowdfunding

platforms in South Africa have failed, and how to overcome these failures, in the hopes

of creating a best practice guide on how to successfully crowdfund in South Africa and

similar emerging markets. This will be done by using semi-structured interviews with

locally successfully crowdfunded projects in Cape Town, and those that are just starting

out, to gain an insight on what makes them successful. Crowdfunding platforms

themselves will be interviewed, as will the federal South African government, in hopes of

gaining insight on how to create a better regulatory framework for crowdfunding in this

country.

Local start up companies can be interviewed on their awareness of alternative startup

capital, and their opinion on using crowdfunding for this purpose. In the USA alone, 600

out of 600,000 small businesses funded every year receive venture capital, and about

17,000 receive angel capital (AngelBlog, 2012). Only one out of 100 businesses pitched

to VCs gets funded, and around 1 in 72 businesses pitched to Angels get funded (Payne,

2013). Contrast this with the odds of getting funded on Kickstarter – 48,103 projects were

funded out of a total of 112,944 advertised – a whopping 42.6% success rate (Kickstarter,

2013).

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The public is greatly affected by whatever happens with crowdfunding. The potential for

crowdfunding in emerging markets is massive – the world bank estimates that there are

344 million potential households in emerging markets capable of making small

crowdfund investments, with the ability to deploy up to $96 Billion USD by 2025 in

these investments, 1.8 times the global amount of annual venture capital invested.

Employment growth potential is very large as well. If we look at the USA, Angel

investors contributed 22.9 billion dollars to 67,030 entrepreneurial ventures in 2012,

creating 274,800 jobs (Sohl, 2012). Venture Capital firms contributed 28.3 billion dollars

to 3,267 ventures in 2012 (Agrawal, Catalini, & Goldfarb, 2013). Overall venture-backed

companies account for 11.87 million jobs and 3.1 trillion dollars in revenue, which makes

up 11% of private sector jobs and 21% of US GDP respectively (“Frequently Asked

Questions About Venture Capital,” 2013).

The knock on effects of employment and GDP growth would be spectacular if

crowdfunding takes off with the public, as we have seen. But will the public invest? Are

they concerned they will be defrauded? Why have so many crowdfunding platforms

failed in South Africa? How can the government support crowdfunding? What are the

best practices for a crowdfunding project seeking funds in an emerging market? These

are the issues this report will look into.

There is no academic literature on crowdfunding in emerging markets, as this is such a

new area. This piece is significant because it seeks to answer the above questions and to

give a practical example of what works and what doesn’t in emerging market

crowdfunding.

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1.3 Research Question and Scope

One main research question has been created after analyzing the literature review.

Main Question:

What is the potential of crowdfunding in South Africa for creating employment?

Sub Question 1:

- Why have so many crowdfunding platforms failed in South Africa?

Sub Question 2:

- What are the barriers to running a successful crowdfunding campaign in

South Africa, and how can they be overcome?

Sub Question 3:

- What role should the government play in enabling crowdfunding in South

Africa?

The sub questions link into the main question, as the researcher attempts to seek out what

the “best practices” are for succeeding in a crowdfunding campaign, and what role

government should play in helping out these entrepreneurs.

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1.4 Limitations of the Study

This study will rely on vocal interviews being conducted. The sample size and

demographics of interviewees will be a limiting factor. Only local Cape Town based

crowdfunding projects will be interviewed – there are not many out there, and what

works for them with respect to crowdfunding may not hold true for other emerging

markets. Data gained may be extrapolated to the rest of the world, but this is not the main

focus.

As this is a small-scale qualitative study, it is possible that the findings and outcomes of

the research will not be general enough to apply to other countries. The researcher is

focusing on interviews from businesses in Cape Town. We cannot assume that these

opinions will transfer to Africa, Asia, or other locations not covered.

1.6 Assumptions

The researcher assumes that interviewees will answer questions honestly and in an

unbiased fashion. It is also assumed that interviewees will understand the questions being

asked. If these assumptions are not met, the internal validity of the data gathered will be

questionable, and any conclusions resulting from this data will not be valid. The

researcher does not foresee any problems with interviewees answering questions

untruthfully.

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1.7 Research Ethics

Participants will be informed to the purpose of this study, that their participation is

voluntary, and that their personal details will be kept confidential at all times. Participants

will be notified that their answers to interview questions will be transcribed and coded,

and that their names will be made anonymous. If participants wish to see the transcribed

and coded interviews, they will be provided to them at such time as it is available.

Participants will be notified that they are free to leave the study at any time. Participants

will also be able to review the final draft of this research report if they choose to do so,

and will be given a copy of the final report if they request one.

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SECTION 2: LITERATURE REVIEW

2.1 Introduction

This literature review will focus on a few concepts. Firstly, what is crowdsourcing and

how did it historically begin and evolve into crowdfunding? Secondly, how does

crowdfunding in its current form work, and how is it different from traditional investment

models? Thirdly, How will changes government regulation allow an equity crowdfunding

model to operate, and what are the implications of this to South Africa? Lastly, what are

South Africa’s current economic problems and what is crowdfunding’s potential in

solving those problems in South Africa?

2.2 Background Discussion

2.2.1 Crowdsourcing’s Beginnings

Crowdsourcing is a portmanteau of ‘outsourcing the crowd’ – Jeff Howe coined the word

in 2007. It is traditionally defined as “the act of taking a job traditionally performed by a

designated agent (usually an employee) and outsourcing it to an undefined, generally

large group of people in the form of an open call” (Howe, 2008). Despite this term being

traditionally linked with the Internet age, Howe (2008) states “trend is appearing now not

because the Internet made crowdsourcing possible, but because it made it more

effective”. Albors et al. (2008) agree, stating “thanks to the possibilities of Web 2.0,

organizations can interact with other parties more effectively facilitating online

collaboration and sharing among users.”

15

Kleeman et al. (2008) argue that the presence of Web 2.0 is a prerequisite for

crowdsourcing. However, looking back into history we see that crowdsourcing was used

long before the Internet era. The Oxford English Dictionary, for example, was

crowdsourced. An open call was made to the whole English speaking population of the

world, asking them to identify all words in the English language, describe these terms,

along with an example, and mail them to Oxford where they could be put together into a

dictionary (Lanxon, 2011). With the help of the Internet, the crowdsourcing model spread

and evolved. New crowdsourcing methods have been created, such as crowdvoting,

microwork, macrowork, wisdom of the crowd, creative crowdsourcing, inducement prize

contests, implicit crowdsourcing, and of course crowdfunding (Howe, 2008).

Crowdvoting involves the crowd voting on what they’d like to see done – an example is

threadless.com, where users create t-shirt designs, which are voted on by other users,

with the most popular ones are printed and sold (Howe, 2008).

Microwork involves the crowd doing small, simple, tasks that computers cannot, in return

for a small amount of money. Amazon’s Mechanical Turk is a perfect example – it offers

miniscule amounts of money for tasks computers are unable to perform – such as

searching for a missing yacht in satellite photos, for example (Howe, 2008).

Macrowork requires the crowd to fill in skilled positions for a certain amount of time. E-

lance is an example, where users can bid on specific programming jobs that require a

certain amount of time and skill to complete. Anyone can post a task on eLance. Creative

crowdsourcing is similar, but it focuses more on creative domains such as graphic design,

architecture, art, music, and film (Howe, 2008).

Wisdom of the crowd, or “collective intelligence”, is based on the idea that a group of

people is more knowledgeable than an individual. Wikipedia is an example – anyone can

edit any page, but by having the collective intelligence of the crowd, articles can be

created by the crowd that are much richer in detail and accuracy than any one individual

could create (Howe, 2008).

16

Surowiecki's work "Wisdom of the Crowd" (2004) popularized the notion that the

Internet community could help problem solve and make decisions. Travis (2008) furthers

this notion, saying these principals could be used in research and development.

Inducement prize contests are web-based idea competitions. An example is InnoCentive,

a platform where unsolved corporate science problems are posted. Anyone is free to work

on the solution, and the first person to successfully solve the problem is paid from

$10,000 to 1$ million, depending on the job.

Implicit crowdsourcing is a form of crowdsourcing where users don’t realize they are

contributing to a goal. For example, Google will data-mine a user’s search history to find

keywords for ads.

Lastly, Crowdfunding is the process of funding a project via the small contributions of

many people. It’s defined as “an open call, essentially through the Internet, for the

provision of financial resources either in form of donations (without rewards) or in ex-

change for some form of reward and/or voting rights in order to support initiatives for

specific purposes" (Lambert & Schwienbacher, 2010).

As we can see, crowdsourcing means different things to different people. Estellés-arolas

& González-ladrón-de-guevara (2012) have come up with an integrated crowdsource

definition that takes all these different forms into mind. It is described as “a type of

participative online activity in which an individual, an institution, a non-profit

organization, or company proposes to a group of individuals of varying knowledge,

heterogeneity, and number, via a flexible open call, the voluntary undertaking of a task.

The undertaking of the task, of variable complexity and modularity, and in which the

crowd should participate bringing their work, money, knowledge and/or experience,

always entails mutual benefit. The user will receive the satisfaction of a given type of

need, be it economic, social recognition, self-esteem, or the development of individual

skills”.

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2.2.2 The Different Models of Crowdfunding

The beginnings of online crowdfunding start with the crowdfunding platform Sellaband.

In 2006, Sellaband was launched online. It was, and still is, a music only platform. Fans

were able to fund unsigned bands. When funding reached 50,000 dollars, the band would

receive the money and put it to use on creating a CD in a music studio. The funders were

rewarded with the produced CD, and a share of any further CDs sold. Thus Sellaband

was funding the equivalent of preselling CDs.

Three years later in 2009, Kickstarter launched and took the world by storm. It allowed

funders to back any creative project, not limited to the music domain. It was wildly

successful. The figure below plots its growth from 2009-2012

Figure 2: Total Capital Raised in thousands on Kickstarter by successful projects, 2009-2012. Reprinted from “Some simple economics of crowdfunding” by Agrawal et al., 2013.

What do people fund? The figure below shows where the $2.6 billion spent in 2012 went

to. We see that funding Businesses and Entrepreneurship is the second most common

cause, with 16.9% of the share.

18

Figure 3: Types of crowdfunding ventures, adapted from “Crowdfunding among IT Entrepreneurs in Sweden -A Qualitative Study of the Funding Ecosystem and IT Entrepreneurs’” by Ingram & Teigland, 2013.

Presently, there are over 800 crowdfunding platforms online. All work on one of four

funding models. The first is the donation model – funders will donate their own funds in

return for an intangible benefit – such an example is GoFundMe.

Secondly, and the most popular, is the reward model where funders will receive a reward

for the fund they contribute, with different levels of rewards based on how much was

contributed. The biggest players in this model are Kickstarter and IndieGoGo. Kickstarter

only allows US companies to ask for funding, but there is no such restriction on

IndieGoGo. Sometimes the funder will receive the finished product based on their

contribution, thus this could be seen as a source of pre-purchasing.

Within this model, there are different ways funding takes place. Kickstarter and others

have a return rule, if the donations of funds does not reach a monetary goal, within a

certain time, the funds are returned to the donors and the project is not funded it is an

“all-or-nothing” approach. Others work on a direct donation model where whatever is

donated will be given to the asking company, even if it does not reach its goal.

19

Wash & Solomon (2013) looked at which method was better, and found that both

methods have distinct strengths. They state “Direct donations provide an incentive for

donors to coordinate to solve the complementarity problem, and are more likely to fully

fund projects even when total donations in the marketplace are small. The return rule

encourages people to donate to more projects and to higher risk projects, but has the

potential of spreading out contributions among too many projects, causing few of them to

reach their goal. Both mechanisms appear to be viable means for partially solving the

complementarity problem in matching marketplaces” (Wash & Solomon, 2013)

Thirdly is the lending model. Depending on the platform, funders could be lending

money to an individual, a group, or an entrepreneur in the third world. The funders

receive their money back, usually with interest, unless the loan is socially motivated. A

large socially motivated crowdlending site is Kiva- it offers micro financing to third

world entrepreneurs.

Lastly, the most recent form of crowdfunding is equity crowdfunding. Here, funders will

contribute funds to purchasing shares in private companies. In return, they are rewarded

with shares in the company, shares of the profit the company makes, voting rights, and

whatever else is agreed on.

This form of crowdfunding is very recent, and is presently still illegal in the USA. The

JOBS Act was signed in 2012, making this form of crowdfunding legal, but the Securities

and Exchange Commission (SEC) has not yet implemented the law. It is expected that the

first stage of implementation will be in September 2013, when the ban on public

solicitation of private companies will be lifted. The following year all restrictions will be

lifted, and the public will be able to invest up to $2,000 a year online into private equity

companies. The EU bans EU-wide equity crowdfunding, but country specific local equity

crowdfunding is allowed, and is a thriving business in the UK, Sweden, and Germany.

Australia also allows private equity crowdfunding. A figure of the different forms of

crowdfunding is listed below.

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Figure 4: The different models of crowdfunding presently available. Reprinted from “An introduction to crowdfunding” by Nesta 2012.

These new models of sourcing start up capital are turning the world upside down. No

longer is the power of private equity investment held in angel and venture capitalists. The

democratization of early stage funding is taking place already, in such countries as the

United Kingdom and Australia. Within the year, the United States will open its doors and

the world will follow. Will South Africa follow in its footsteps?

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2.2.3 How Will Changes in the Law Enable an Equity Crowdfunding Model to

Operate?

Currently private equity crowdfunding is only legal in the United Kingdom, Sweden,

Germany, and Australia. Cumming, Günther, & Schweizer (2012) describe the state of

private equity crowdfunding (PEC) as following: “As of April 2012, there were a total of

thirty-nine crowdfunding platforms that facilitate equity crowdfunding or revenue-

sharing models, which is 7.3% of the 452 total crowdfunding sites in existence”. A figure

shows PEC’s share of the crowdfunding market below.

Figure 5: Number of private equity crowdfunding (PEC) platforms in existence. Retrieved from “Signaling in Equity Crowdfunding” by Cumming, Günther, & Schweizer, 2012.

Currently, in order to invest in a private firm, investors must be accredited in the USA,

under Rule 506(c). This is a legacy of the 1933 Securities Act. Accredited in this term

means the person has over 1 million dollars in wealth, not including his/her main house,

or the person makes over 200,000 dollars a year. Rapoport (2012) argues that “only

approximately 10 per cent of accredited investors have invested in Rule 506 offerings.

Once Rule 506(c) offerings are permitted to be advertised publicly over the internet and

broadcast media, more potential investors will be aware of investment opportunities, and

early stage companies will have access to a greater range of funding sources”

22

Pope (2011) argues, and argues that a small offering exemption is long overdue in the

USA, and that such an exemption will allow entrepreneurs “to use crowdfunding to raise

capital for business growth and development”. Shiller (2012) agrees, stating that

“capitalism must be constantly updated through innovation in order to be successful in its

purpose of achieving society's goals. Three recent innovations—the benefit corporation,

crowd funding, and the social impact bond—are good examples of how finance and

financiers can contribute to attaining these goals.”

President Obama signed the Jumpstart our Businesses Act in April 2012, giving life to

PEC in the USA. The first stage, confusingly called Stage 2, due to be implemented

September 2013, lifts the restrictions that private equity sales cannot solicit the public

(Agrawal et al., 2013b). The third stage, due to be implemented in 2014, indeed makes a

small offering exemption, allowing companies to fundraise up to 1 million dollars from

the public, not just accredited investors. Meanwhile, the American pubic will be allowed

to invest the greater of $2,000 or 5% of their salary if their income is under $100,000 a

year, and if their income is greater than $100,000 they are allowed to invest 10% of their

income, up to a maximum of $100,000. These transactions must be made through a

broker, or authorized “funding portal” (Hanks, 2013).

On the surface, this appears to be great news for the general public that was completely

locked out of the private equity market. Gains in this market are known to exceed 15%

per annum, and the public now has access to it. However, Rapoport (2012) states that this

upcoming change in the law does not go far enough, as it restricts investment companies

from buying funds on private equity portals. This, in turn, does not allow investors to

diversify to a great extent, and thus market risk is unreasonably high. He states that “in

early-stage investing, perhaps more than any other field, the prudent investor must have a

well-diversified set of investments to ensure that the failures are balanced by the

superstars. The easiest way to diversify an investment portfolio is to participate in a

pooled fund managed by a professional investor. By pooling capital, even an investor

with limited resources can gain the benefits of diversification by spreading her capital

among several different start-ups”.

23

The general public is thus not allowed the benefits of a pooled fund – a fundamental

mistake it seems. However, let us not forget that these laws have not been implemented

yet, and they are still up for public comment and debate. Hopefully pieces such as

Rapaport’s will encourage Congress to lift the ban on investment funds operating in PEC.

The situation in Europe is not as developed on a broad scale. While PEC is legal in

specific European countries, only citizens of those specific countries can invest in

companies advertising private sales. International sales are not allowed. (Hanks, 2013)

argues that “Until pan-European regulation is effected, the true potential of this new form

of capital-raising will not be realized.”

On the outside, it seems like the EU has looser laws when it comes to private equity

offerings. Offerings under 5 million euro or to less than 150 people are exempt from the

Prospectus Directive – meaning that the companies offering their shares do not have to

create an expensive Prospectus before they fundraise. However, below 5 million,

National laws take effect, and there are all sorts of different regulations within states of

the EU. Under 100,000 euro, EU law pre-empts National law, and no Prospectus is

required (Hanks, 2013).

However, as Hanks (2013) points out, “the problem is that, if US expectations are any

guide, crowdfunding and other small online offerings are likely to fall within the

E100,000 to E5 million range. Depending on the regulations which various national

authorities impose on offerings falling within this range, small online offerings may

either be unnaturally constrained to amounts less than E100,000, or may be subject to

varying regulatory burden in different jurisdictions, causing the issuer to offer its

securities only in certain countries”. As we can see, this will cause the issuer of funds to

only fundraise in one particular country, as they will likely not want to deal with 27

different sets of regulations on fundraising. This, in turn will stifle broader, EU-wide

funding.

24

What happens in the EU and Europe with regards to PEC will be looked at closely in

South Africa and the emerging market. Currently private equity crowdfunding is illegal

in South Africa, but with the sustained success of rewards based crowdfunding, this may

change.

And what about the public? A huge issue is fraud – how does the public know it’s

investment is going to a legitimate business and not a crook? Belleflamme, Lambert, &

Schwienbacher (2011) argue that crowdfunders are most likely to be given very little

consumer protection against fraud, as they only invest tiny amounts. Stemler (2013)

replies that the crowdfunding portals the SEC will create have “requirements to prevent

fraud and abuse, including ensuring that investors understand investing and its risks and

monitoring investor compliance with individual investment limits. Furthermore, funding

portals are prohibited from offering investment advice and from actively pushing

securities on investors.” However, as of the present day, the SEC has not listed the

antifraud prevention measures that portals will have to implement.

Hanks (2013) looks at both sides of the argument, specifically with the ability of the

“wisdom of the crowd” to pick up frauds and concludes that “while some crowdfunding

proponents have asserted that there will be little fraud in the crowdfunding context, some

confusion has crept into the debate by reason of the use of ‘fraud’ to mean different

things. It is true that the ‘crowd’ may be able to identify and ‘out’ a fake promoter or a

fake product. But the antifraud provisions of US securities law are much broader than

that. Liability attaches to any ‘untrue statement of a material fact’ and the liability that

applies to Title III crowdfunding imposes the burden of proof on the issuer.”

On the other side of the fence, the public will now be able to legally invest in a lucrative

market that was not open to them before, with gains of 20% not uncommon (Lerner,

2006). The public also stands to gain from all the extra employment, economic growth,

and tax revenues that come with an increase of successful businesses.

25

2.2.4 Economic Situation in South Africa and Crowdfunding’s Potential in

Improving It.

SMMEs account for 40% of South Africa’s GDP (“Business South Africa,” 2008), with

about 6 million in existence at last count (Amra, Hlatshwayo, & Mcmillan, 2013). Since

1994, South Africa’s unemployment rate has consistently hovered around 25%, and it

remains one of South Africa’s key developmental challenges (Amra et al., 2013). This

number increases to 40% if we include those that have given up the search for work

(J.P.Morgan & Dalberg, 2010). It is even higher for youth, with a staggering 70%

unemployed (Mbele, 2013). Indeed, youth between the ages of 15 and 24 make up more

than half of the 10 million unemployed people in South Africa (Mbele, 2013).

Amra et al. (2013) found that women have a significantly lower probability of being

employed than males, and that Coloureds, Whites, and Indians have a significantly higher

probability of being employed than Africans. Kingdon & Knight (2001) found that the

unemployed in South Africa do not choose to be unemployed, and that the unemployed

are worse off than the informally employed. Klasen & Woolard (2000) found that most

unemployed people in South Africa had access to employment income or state transfers

received by other household members. However, this was found to be detrimental, as it

drags many households supporting unemployed people into poverty and it involuntarily

increases house size.

These findings have grave implications for the future of South Africa. It creates a cycle of

poverty and unemployment that is hard to break, with many children choosing to forgo

education to chase job opportunities, as shown by the 67.8% matric pass rate in South

Africa (Education, 2013).

26

The New Growth Plan, released by the Ministry of Economics in 2010, aims to create

employment via the development of small business, with an expected reduction in the

unemployment rate from 25% to 15% (J.P.Morgan & Dalberg, 2010). If we look at

J.P.Morgan & Dalberg's (2010) report on SMEs in South Africa, we see that currently 5.6

million small businesses produce 11.6 million total jobs in South Africa, out of a total of

18 million in the labour force (“Labor Force, Total in South Africa.,” 2010). We see that

67% of small businesses, defined as those with less than 5 employees, have no employees

other than the owners (J.P.Morgan & Dalberg, 2010). Since small businesses represent

97% of SMMEs, this is worrying (J.P.Morgan & Dalberg, 2010). Clearly, if the smallest

businesses in the country could be engaged to expand, they would create more

employment. A figure of small business employment is shown below.

Figure 6: Employment versus business size in South Africa. Retrieved from “Catalyst for Growth in South Africa” by J.P. Morgan & Dalberg, 2010.

27

Early stage entrepreneurial activity in South, as measured by the Global Entrepreneurship

Monitor (2010), also fell short, with South Africa scoring 35 out of 54 countries, with a

score of 9, below the average of 11.7, and far behind it’s emerging market peers. A figure

is shown below.

Figure 7 :Total Early Stage Entrepreneurial Activity, 2010. Retrieved from “GEM 2010 Global Report” by the Global Entrepreneurship Monitor, 2010.

Why are small businesses failing to take off in South Africa? Lawton (2002) describes

business mentorship as a key to SME success. J.P.Morgan & Dalberg (2010) builds on

this and describe South African businesses as having a lack of knowledge and networks

required to be successful in a particular market. Lack of an enabling environment is seen

as a key barrier to growth, with crime and theft being ranked as a high barrier.

The banking system remains the main source of capital to start and grow businesses, with

47% of business owners formally banking with commercial banks in South Africa

(J.P.Morgan & Dalberg, 2010). However Segrado (2005) states that while commercial

banks in emerging markets are in a perfect position to extend financial services to micro

entrepreneurs, they are still reluctant to do so. Dalberg Global Development Advisor

(2012) found that lack of collateral is the primary reason that banks don’t extend credit in

South Africa, and that high interest rates charged on credit is one of SMME’s biggest

challenges in South Africa.

28

Crowdfunding enables new and existing business owners to raise funds for their

businesses. It breaks down the barriers that the poor in this country are faced with – lack

of collateral or credit history. It is different from micro financing, as there is no principal

or debt to repay, just a product or service to deliver, and it allows for market validation of

the business idea.

There have been no academic studies on the effects of crowdfunding on job growth, as

this is such a new area, but Prive (2013) suggests that a startup that has gone through a

successful seed round of financing can hire at least four people full time. Clearly

President Obama signed the Jumpstart Our Jobs (JOBS) Act, which legalizes private

equity crowdfunding, because the prevailing wisdom was that it would create jobs, as the

title alludes to. FitzGerald (2013) states that the impact of crowdfunding on business

creation, job growth, and financial markets will not be known for a while, but it is a risk

worth taking.

The World Bank (2013)states that crowdfunding is starting to spread globally and it’s

potential in the developing world could be significant for the employment, innovation,

and growth. In order to do this it must learn what the factors for successful crowdfunding

are from the developed world. It also makes mention that emerging markets have the

opportunity to implement entrepreneurial funding systems that include crowdfunding

investment that are more advanced than the legacy systems prevalent in the developing

word, and thus leapfrog the developed world in this regard.

The World Bank (2013) report states that Africa will have $2.5 billion out of the $95

billion in yearly crowdfunding investment in emerging markets by 2025. This is due in

part to the small amount of social media penetration in Africa, likely due to limited

Internet connectivity. A figure is shown below.

29

Figure 8: Market Potential for Crowdfunding Across the Regions. Retrieved from “Crowdfunding’s Potential for the Developing World” by The World Bank, 2013

The report concludes that policy makers must focus on four key enablers for a successful

crowdfunding investment ecosystem, namely economic regulation, entrepreneurial

culture, community engagement, and technology. A figure of this framework is shown

below.

30

Figure 9: Four elements of a Crowdfunding Investing Ecosystem. Retrieved from “Crowdfunding’s Potential for the Developing World” by The World Bank, 2013

31

2.3 Conclusion

The literature review discussed what crowdsourcing is; a way of sourcing from the

crowd, and how it evolved to crowdfunding through the use of the Internet. It then

discussed how crowdfunding currently works in all its variations, and how it is different

from traditional models of funding such as loans and venture capital. The academic

discussion around how the current changes in law in the US and Europe are enabling

equity crowdfunding was summarized, and it was noted that this will guide the future of

equity crowdfunding law for South Africa.

The current economic conditions of South Africa were highlighted – 10 million people

without a job and a very high and consistent unemployment rate of 25% (40% when

including those not looking for work), with 70% youth unemployment representing half

of the 10 million unemployed (Mbele, 2013). The great influence of SMMEs in South

Africa on economic activity was mentioned – they create 40% of the nations GDP, and

11.6 million of it’s 18 million jobs (“Business South Africa,” 2008).

It was noted that crowdfunding in emerging markets has the potential to create 95 billion

dollars of investment a year by 2025, almost twice the venture capital investments in the

world, with 2.5 billion of yearly investments in Africa alone (World Bank, 2013).

Semi structured interviews with current South African crowdfunding platforms,

businesses looking for crowdfunding, and federal government will be conducted to

further explore the four research questions created.

32

Namely, as shown in the Appendix 1, I will structure my interviews to specifically ask

crowdfunding projects what their barriers to success have been and their perceived role

for government. I will ask current successful crowdfunding platforms why others before

them have failed and what they are doing to ensure the success of their sponsored

projects, and if this is helping to grow businesses. Lastly, I will ask government where

they perceive their role in all of this and whether they see crowdfunding increasing

employment.

33

SECTION 3: RESEARCH METHODOLOGY

3.1 Research Approach & Strategy

The research methodology employed will be qualitative inductive theory development

using multiple case studies. An inductive approach is appropriate because inductive

research seeks to take general observations and make conclusions from them, creating

theory in the process. Semi structured interviews will be used to gather information.

These interviews will be transcribed and coded. Codes will be combined into themes, and

generalizations will be inferred from this information.

As crowdfunding is such a new area of study, qualitative research methods are very

appropriate according to Eisenhardt (1989). Creswell (2013) agrees when he states that

qualitative research is an appropriate means for finding information on a

topic that has scant information available and lacks an established theoretical basis.

I will be seeking not just one perspective, but many, from local businesses that have used

crowdfunding, using multiple case studies. Guba & Lincoln (1998) agree that this an

appropriate use of qualitative methods when they state that “the goal of a qualitative

research project is not to always find a single ultimate answer to a complex problem, but

to recognize that there may be multiple perspectives held by different people and that

each of these perspectives has equal truth or validity”.

34

Relevant research questions were developed via an extensive literature review.

Data gathering interviews were conducted on twelve locally crowdfunded projects, one

successful local crowdfunding platform, one successfully crowdfunded project from

overseas, and local township businesses to seek out the answers to my research questions.

Thomas (2006) states that an inductive approach is one which “primarily use[s] detailed

readings of raw data do derive concepts, themes, or a model through interpretations made

from the raw data by an evaluator or researcher”. Following on, conclusions were drawn

by transcribing, coding and theming interviews using my own interpretation of the data.

Assumptions were made that interviewees clearly understood the questions, and that they

answered them honestly.

The major advantage of qualitative research is that the researcher can provide more depth

and detail than in quantitative research – the researcher can record attitudes, feelings, and

behaviours. Qualitative research methods have the advantage of exposing the researcher

to different viewpoints and perspectives.

The disadvantages of qualitative research is that there are usually less people studied

when compared to quantitative studies, and there are no variables to control for. This then

makes it harder to generalize a finding to the whole population.

35

3.2 Research Design, Data Collection Methods, and Research Instruments

The research design followed a case study design. Exclusively primary data was retrieved

in the form of nineteen semi-structured interviews. Each interview lasted from 10 to 90

minutes. As this is an explorative study, surveys and questionnaires were inappropriate as

these instruments were too rigid. A semi structured interview allowed for more flexible

data gathering, with the ability to explore specific areas the subjects mentioned in further

detail than a survey would allow. As it was unknown what the outcome of these

interviews would be, as there has been no previous study on South African

crowdfunding, the choice of semi-structured interviews was appropriate.

The majority of interviews were conducted at a local Cape Town crowdfunding platform

launch event. The platform name was made anonymous, with the placement

PlatformName standing for this local platform throughout the report and transcribed

interviews. Twelve interviews were conducted here, 11 of which were with local

businesses that have raised or are looking to raise funds on PlatformName. Out of the 11

interviewed, two had already successfully raised what they were asking for, while 10

were launching on PlatformName that day and are still in the process of crowdfunding.

All these interviews were conducted face to face, with a recording device in one hand,

and a notepad in the other to jot down notes. All interviews followed the same structure,

namely introductions and ethical clearance, followed by a set of five open-ended

questions, with room to explore responses further. The six questions can be seen in

Appendix 1. A more thorough, but unplanned interview, was conducted with a high level

member of the Department of Arts and Culture who was a keynote speaker at the

conference. The transcript of this can be found as Interview #19, in Appendix 3.1.

1 Please contact the researcher at [email protected] for the full transcriptions of the interviews.

36

A further two interviews were conducted on Skype. These interviews were also recorded.

One was conducted with a New Zealand based company that successfully crowdfunded

more than ten times the amount they sought on the world’s largest crowdfunding site,

Kickstarter. A similar, but more thorough set of 12 questions was discussed with the two

co-founders of this company. These questions and the transcript of the interview can be

seen as Interview #6 in Appendix 3. The other interview was conducted with a UCT GSB

instructor that had successfully used crowdfunding to bring a local musical act to Cape

Town using the local musical crowdfunding platform Troubadour Appendix 3 holds the

questions and transcripts of this interview under Interview #7.

A thorough fifteen question, 90 minute long interview was conducted with the only

successful South African crowdfunding platform out there, PlatformName, at their local

offices in Woodstock. This interview and its questions can be found as Interview #19 in

Appendix 3.

Lastly, impromptu interviews were conducted over the day long Shapekasi

Entrepreneurship Conference in Khayeltisha. Some were recorded, whilst others were

not, with only field notes being taken down. These did not follow a set structure, but

rather explored local township businesses’ knowledge of crowdfunding and it’s potential

to help them out in their endeavors. Transcripts and notes of these interviews can be

found as Interviews #2-5 in Appendix 3.

37

3.3 Population and Sampling

The initial sample group was identified as any local Cape Town business that had

launched, or was in the process, of launching a rewards based crowdfunding campaign.

The first interview conducted was with the owners of the local PlatformName

crowdfunding platform, the only active platform in Cape Town. The owners suggested I

speak to projects launching on their platform at their official launch party the next week,

which I did – a form of snowball sampling. This is how I found 11 of the businesses

interviewed. This form of sampling was appropriate in this instance as this is an

exploratory study, and the amount of local businesses crowdfunding is extremely small

and concentrated on PlatformName.

This event was also where I met the representative of the Department of Arts and Culture,

conducting an on the spot impromptu interview with her. In addition, to get a more

diverse view, a highly successful international crowdfunding project from Kickstarter

was interviewed. An interview was also conducted with a person who ran a successful

musical event (but not business) on the local Troubadour crowdfunding platform.

Lastly, interviews were conducted on an ad hoc, random basis at the Shapekasi

Entrepreneurship Conference in Khayelitsha, as I walked by stalls promoting products

and businesses. At times people came and approached me to tell me about their

experience with crowdfunding, as they had heard I was there researching the subject.

38

3.4 Data Analysis

An inductive, thematic analysis of the data gathered was conducted. (Bryman & Bell,

2011) have provided a six-step guide on how to conduct such an analysis, and these were

the methods that were followed in producing this research report. The steps were as

follows:

1. Familiarize yourself with the data

Before each interview, the researcher did preliminary research on the business or person

being interviewed. The researched transcribed every audio interview himself, repeatedly

listening to what was said by the interviewee. If something was discussed that the

researcher was not knowledgeable of, such as abbreviations or people that the researcher

was not familiar with, further research would be done after the fact to try and understand

what was being expressed.

2. Generate initial codes

After transcribing the interviews, the researcher used a software called Dedoose to assign

codes to certain information in the interviews. A total of 121 codes were produced from

the 19 interviews, with many of these being sub codes of main codes. A total of 37 main

codes were produced, with many, but not all, having sub codes. Iterations were done after

all transcripts were coded, seeking to reduce the number of codes by grouping like codes.

3. Search for themes

A matrix of code co-occurrence was created on Dedoose, where the researcher could see

all the codes, and when two or more codes co-occurred, and the number of co-

occurrences of each. Large number of specific co-occurrences generally inferred that the

two codes belong to the same category.

39

4. Review themes

Themes were reviewed to make sure that their codes all belong there. Smaller themes

were grouped into larger ones when it made sense to the researcher. A total of six themes

emerged.

5. Define and name themes

The five themes that emerged were named accordingly, based on what the researcher felt

was appropriate given the codes and context.

6. Produce the report

The report was produced over the course of two weeks, as soon as the last interview

finished on November 28.

This way of analyzing the data is justified according to Thomas (2006), who stated that

the result of an inductive analysis should produce a framework that summarizes the raw

data and conveys key themes and processes.

40

SECTION 4: RESEARCH FINDINGS, ANALYSIS AND DISCUSSION

4.1 Research Findings, Analysis, & Discussion

4.1.1 Interview Groupings

Nineteen interviews were conducted, with 17 of them being fully recorded. The

interviewer also took down notes on a paper pad or laptop whilst the interviewee was

responding. Notes of the context, location, tone, and gestures made were taken down

when appropriate. The structure of the interviews was semi structured, with a core of six

basic questions, as show in Appendix 1, however more were added when appropriate, and

the researcher made every attempt to dive in deeper when possible. The interviewees

were made anonymous, a table of who they are and what company they represent is listed

below.

Table 1: Anonymous interview subjects and their background. Original.

PlatformOwner & PA Owner of a successful Cape Town based online

crowdfunding platform, and his PA.

TownshipEntrepreneur1 Local township shoemaker looking to expand his business

TownshipEntrepreneur2 Local township DJ selling t-shirts to support his shows

LocalCrowdFunder1,

Angel, AngelPA

Local entrepreneur that will crowdfund his renewable

energy idea on PlatformOwner's website, an Angel

Investor from AngelHub, and the Angel's PA

ZimbabweCrowdFunder Tech entrepreneur who crowdfunded his way onto

StartUpBus Africa using mobile money

InternationalCrowdFunde

r1 & 2

Two founders of a business in a developed country that

raised 10x the amount asked for on Kickstarter

LocalCrowdFunder2 Person who ran a successful crowdfunding campaign to

41

bring a musical artist to Cape Town on her own accord

TownshipEntrepreneur3 Township entrepreneur running a bakery that successfully

used PlatformOwner's platform to raise capital to expand

his business.

LocalCrowdFunder3 Person representing a social after school project brining

together at youth risk and unwanted dogs, currently

seeking funding on PlatformOwner's Platform

LocalCrowdFunder4 Founder of a hanging garden system, currently seeking

funding on PlatformOwner's Platform

LocalCrowdFunder5 Founder of a community open streets even, successfully

raised required funds on PlatformOwner's Platform

LocalCrowdFunder6 Founder of a tech startup focusing on hand crafted

speakers, launching crowdfunding campaign on day of

interview on PlatformOwner's Platform

LocalCrowdFunder7 Artist behind a film project currently seeking funding on

PlatformOwner's Platform

LocalCrowdFunder8 Artist behind an art installation, launching a

crowdfunding campaign on day of interview on


LocalCrowdFunder9 Performer behind an performance project, launching a



LocalCrowdFunder10 Person promoting a locally produced TV show, currently

seeking funding on PlatformOwner's Platform

LocalCrowdFunder11 Poet promoting new book, successfully raised required

funds on PlatformOwner's Platform for a book launch

LocalCrowdFunder12 Founder of a lesson course on Xhosa, launching a



42

Government Person of very high position in Department of Arts and

Culture, South Africa federal government.

A list of where the interview took place, how long it lasted, the method used, and whether

the interview was fully transcribed or not is listed below. The interview numbers

correspond to Appendix 3’s transcribed interviews. Only one out of 19 interviews was

not recorded on audio, and thus not transcribed, but notes have been provided in absence

of this. One other interview was partially recorded, with beginning notes added in before

the full transcript as seen in Appendix 3 for Interview #4.

43

Table 2: Interview length. location, and format. Original.

# Interviewee Duratio

n

Location Method Transcribed?

1 PlatformOwner & PA 01:10:55 Woodstock,

Western

Cape

Face to

Face

Y

2 TownshipEntrepreneur1 00:05:25 Khayelitsha,

Western

Cape

Face to

Face

Y

3 TownshipEntrepreneur2 00:03:30 Khayelitsha,

Western

Cape

Face to

Face

Y

4 LocalCrowdFunder1,

AngelInvestor, AngelPA

Unknow

n

Khayelitsha,

Western

Cape

Face to

Face

P

5 ZimbabweCrowdFunder Unknow

n

Khayelitsha,

Western

Cape

Face to

Face

N

6 InternationalCrowdFunder1

&2

00:33:15 Skype Skype Y

7 LocalCrowdFunder2 00:28:30 Skype Skype Y

8 TownshipEntrepreneur3 00:20:13 Green Point,

Western

Cape

Face to

Face

Y

9 LocalCrowdFunder3 00:12:50 Green Point,

Western

Cape

Face to

Face

Y


Western

Face to

Face

Y

44

Cape


Western

Cape

Face to

Face

Y


Western

Cape

Face to

Face

Y


Western

Cape

Face to

Face

Y


Western

Cape

Face to

Face

Y


Western

Cape

Face to

Face

Y


Western

Cape

Face to

Face

Y


Western

Cape

Face to

Face

Y


Western

Cape

Face to

Face

Y

19 Government 0:14:22 Green Point,

Western

Cape

Face to

Face

Y

45

Codes that were only used sparingly and in only a small amount of interviews (mostly

one) were treated as outliers and removed before consolidating the remaining codes into

themes. Thirty-two main codes emerged out of this process, with many having sub codes

– including this category of codes, the number of total codes stands at 120 codes. A full

table of codes and how they relate to themes can be found in Appendix 2.

Through numerous iterations, the researcher managed to group all the main 32 codes into

five themes.

Five main themes emerged from the coding of the data were:

1) Barriers and Accessibility

2) Government

3) Planning and Support

4) Social Networks

5) The why and how of crowdfunding

The table below shows which of the main codes were grouped into what themes.

46

Table 3: Coding of Themes. Original

Activating the Crowd Social Networks

Minority shareholders Barriers & Accessibility

Alternative Financing Barriers & Accessibility

Arts & Creativity Why Crowdfund & How?

Barriers Barriers & Accessibility

Community Social Networks

Competition Government

Concerns Barriers & Accessibility

Concerns of Paying online? Barriers & Accessibility

Criticisms of CF Barriers & Accessibility

Crowdfunding Types Why Crowdfund & How?

Did Mentorship help? Planning & Support

Entrepreneurship Planning & Support

Financing Barriers & Accessibility

Funding Gap Barriers & Accessibility

Further interest from investors post

Campaign? Why Crowdfund & How?

Government Government

Innovation Planning & Support

Investment Barriers & Accessibility

JOBS Act Government

Looked at Alternative Funding? Barriers & Accessibility

Mobile Money Barriers & Accessibility

Natural Selection Government

Partners Planning & Support

Planning Planning & Support

Raising more than requested Planning & Support

Reason for Crowdfunding Why Crowdfund & How?

47

SMEs Government

Success Planning & Support

Planning & Support Planning & Support

Sustainability Planning & Support

Would use platform again Why Crowdfund & How?

48

4.2 Themes

Five themes will be discussed, diving into greater coding detail when appropriate. The

researcher feels these five themes overall encompass all of the major worldviews and

opinions expressed in the interviews.

4.2.1 Barriers and Accessibility

Figure 10: Codes comprising Barriers and Accessibility theme. Original

This theme consists of the nine main codes seen above. Some of these codes, such as

Barriers have sub-codes, and the most prominent have been expanded out below, with

further explanation and analysis.

Barriers and Accessibility

Alternative Financing

Barriers

Concerns

Criticisms of Crowdfunding

Financing

Investment

Funding Gap

Mobile Money

49

Accessibility in this context has to do with how accessible things are, both from an

entrepreneurial point of view – such as financial grants, and from a societal point of view,

such as Internet access and formal banking that enables a person to engage in

crowdfunding online. Entrepreneurs interviewed faced varying barriers and accessibility

issues as shown in the codes, the most common of which are highlighted and discussed

below.

Seeking out financing was seen as a direct time competitor of creating a great product. As

an example, InternationalCrowdFunder1 stated that with respect to finding finance

“the prevailing wisdom seems to be ‘looking for funding is like a fulltime job’ and if you

don’t really need it then it takes, and especially if you’re a team of two, it takes valuable

time and effort away from actually making stuff so when we – crowdfunding makes it so

you don’t have to do that”. Here he shows that looking for traditional financing is an

entrepreneurial barrier to focusing on creating your product, as it takes up so much time.

LocalCrowdFunder1 described not having access to traditional startup capital in South

Africa as a barrier to business growth, with crowdfunding a potential solution when he

stated “the gap is between entrepreneurs and the funding. So the interesting thing that

came out is that entrepreneurs startups are looking for between 500,000 and 5 million, but

VCs and other funders, they start at 10 million. So you find this complete disconnect

between the ecosystem”. Indeed the World Bank (2013) in it’s report mentions that this is

small stage funding is exactly where crowdfunding can shine, as venture capitalists and

angel investors don’t bother investing such small sums of money.

Mobile payments were a big topic when it came to enabling great accessibility of

crowdfunding on the continent. Indeed, ZimbabweCrowdFunder stated that the only

reason he was successfully crowdfunded his way onto the StartUpBus Africa in

Zimbabwe was through mobile payment systems like MPesa. Otherwise, he thought he

could not raise enough capital online from his network in Zimbabwe due to lack of access

to formal banking. LocalCrowdFunder2 agreed when stating that “there might be a way

of [crowdfunding without traditional banking], I don’t know if you’re looking at cell

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phones, people have cellphones, so is there another way that people could go about, so

for example, in townships it’s big”.

A Ghanaian participant on the StartUpBus stated that he attempted to crowdfund in

Ghana via IndieGoGo, a large well know American crowdfunding platform, but people

were concerned with paying online with their credit cards, and he was unsuccessful in

raising capital from his network. Perhaps if there was a way of crowdfunding using

mobile currency he would of not had this problem. Government seems to agree when

stating that “Mobile technology in Africa has been amazing. MPesa in particular” when

speaking about increasing access to crowdfunding to the African masses.

There were only two mentions of minority shareholders as being a barrier.

AngelInvestor was concerned about investing in businesses that were previously equity

crowdfunded because of the mass amount of minority shareholders they would have to

deal with, and noted this as a barrier to further investment from his side.

InternationalCrowdFunder1 thought the same, saying, “I think there’s a completely

different set of benefits and concerns for the equity-based stuff. Yea I mean, I totally

understand that you wouldn’t want to be dealing with thousands of minority shareholders,

unless you really, really had to. So I think by, from the project creator side, I think you’re

probably more attractive as an investment vehicle if you’ve just done it your self and

taken regular crowdfunding, then if you had gone equity crowdfunding”. However it is

noted that UK based Seedrs, the biggest equity crowdfunding platform in the world,

pools all minority shares sold on its site into one legal shareholder, itself, to get over this

problem (Seedrs, 2013).

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4.2.1.1 Alternative Financing

Figure 11: Breakdown of Alternative Financing subtheme into codes. Original.

A key question asked to every startup interviewed was whether they searched for

alternative forms of financings before crowdfunding, or whether they jumped straight in.

The interviewee was further asked to explain whether they had access to this form of

financing or whether they did not.

Out of those that answered 5 stated that they did indeed look at alternative funding before

hand, and 2 stated that they did not. A figure is shown below. Further discussion of

barriers to formal financing is found under the Barriers subtheme.

Alternative Financing

Disapora

Bartering

International Donors

Grants

52

Figure 12: Was alternative financings sought out before turning to crowdfunding? Results broken down by number of interviewees. Original.

Grants and government support were described as coming with too much red tape and

creative control. For example, LocalCrowdFunder12 states that “a government grant,

yea I could go get a government grant and fight with a whole bunch of other people for

the government's money, and then have the government breathing over my shoulder, I

have to put out millions of forms, and then I have to deliver a certain thing which they

might try to influence in certain ways. And I just don't feel like that”.

LocalCrowdFunder7 states that “Look, there are things like the DTI we can approach,

ok. But it takes 18 months to get money out of there. And we don't have that amount of

time so - we'd all starve to death in the meantime” when describing government support.

Government support is seen as taking to long to deliver. PA sums up this ethos, stating

that “one of out HR people said, everyone else rolls out the red carpet, but in SA we roll

out the red tape”. However, it is noted that in further findings, all entrepreneurs

interviewed welcome government support of crowdfunding itself.

5

2

Alternative +inancing sought before crowdfunding ?

Yes

No

53

4.2.1.2 Barriers

Figure 13: Barriers sub-theme broken down into corresponding codes. Original.

Barriers was a major subtheme, encompasses things that are barriers to entrepreneurs,

government, and the public when it comes to using, implementing, or promoting

crowdfunding. It also encompasses barriers that entrepreneurs face in general when

attempting to start a business in the South African socio-economic climate.

The figure below shows how many times each barrier was mentioned in all of the

interviews conducted. Education is the most commonly mentioned barrier, with 9

occurrences, followed closely by risk with eight. Wealth distribution comes in third with

6 mentions, and lack of education and lack of philanthropy come in fourth with 5

mentions each.

Barriers

Lack of Philantrophy Barriers to

Capital

Culture of Entitlement

Disposable income

Ease of use

Education

Internet Connectivety

Lack of Education

Accessibility Mindset

Poverty

No Guidance

Risk

Secrecy Concerns

Value

Wealth distribution

54

Figure 14: A breakdown of how many times each barrier was mentioned through all interviews. Original.

When education was mentioned, it was used in varying contexts. One such context was

that the public is not properly educated about how crowdfunding works, and about the

safety of paying online. LocalCrowdFunder3 sums this up when she states “So you

know even guiding my parents through the process [of crowdfunding], with them it's the

old generation, looking at the website…not knowing where to click, even though it says

‘to support this project click here’ in the right hand corner. So if somebody did a little bit

of, yea I mean, they need to be educated, [unintelligible] somebody to sort of take it on”.

This further ties into the role government should play in crowdfunding, as interviewees

specifically stated that the government has a role to educate the public about

crowdfunding. This will be further discussed in the Government theme.

PlatformOwner supports this view, when he comments specifically on equity

crowdfunding he mentions, “Will it become a reality? Yes. Challenges will be trust, huge

trust. Regulatory challenges will come in second. Education and understanding of how it

works”.

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An entrepreneur’s own lack of education about how crowdfunding is also a barrier. As

PlatformOwner puts it, “I think that one of the drawbacks of this [crowdfunding] is that;

it took me a long time to understand how this works. And I think unless you are engaging

with social media, unless you're engaging with internet shopping, it could be - which is

generally, it seems to be a younger generation thing. I don't think people are like huh?

They don't get it. It's almost like people are educating people on how this operates. And I

had to educate myself, because I also didn't know how I could do it, and I didn't know...

because I'm doing a performance, I didn't know how I could generate money through

doing a performance. I don't have such concrete things; I've had to generate concrete

objects in order to develop the rewards. But it took me a while to understand that - to

look at how we'd do it”.

TownshipEntrepreneur3 states that “I've been in and out of banks, waiting for financial

institutions, I've talked to many people. I've talked to many institutions, national financial

institutions. But however, no one was there to assist me, therefore there was something in

the back of my head that told me that I should start leveraging what I have”.

Lack of education also tied into other barriers, such as lack of access to capital.

LocalCrowdFunder6 points out that “I was lucky enough to be able to borrow enough

cash to start this from my dad. Most people aren't, so I think, from entrepreneurship

circles I have been in, a lot of people say, I don't know how to get the funding, I don't

know how to get this started, I don't know where to begin”.

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Risk is always a barrier to starting a new enterprise, as there is inherent risk in any

businesses, and especially small businesses as 5 of 7 small businesses in South Africa

will fail within a year of starting up (Kgosana, 2013). When speaking about risk,

LocalCrowdFunder6 mentions “I think just from a logical perspective, the concept of

risk is something that's very intimidating for a lot of entrepreneurs when it comes to

money. So the possibility of being able to say well, I don't have enough for a production

run, I'm not going to take a risk - I think that's very appealing as well.” Risk therefore

holds back people from starting their own businesses, and there is a higher risk when

using traditional lending such as banking, which requires collateral that can be lost, as

compared to crowdfunding, which requires nothing but a product to deliver.

PlatformOwner agrees with this position when he states “Well yea, and that’s one of the

reasons I think rewards based crowdfunding is what I call appropriate crowdfunding, and

why it’s the model we went for here, rather than loan, because you know – Kiva, loans,

that kind of stuff. You give me 100 bucks; I give you 100 bucks back in terms of product.

That means, I only have to give you one product. If you give me $100 and I have to pay

you back $100 plus interest, that means I’ve got to sell 10 x $100 to make the profit, to

pay you back. So the ask for return is so much bigger. Whereas this is much more

straightforward. Here’s $100, I give you $100 back, and I make a profit on it. That’s a

way to start a business. Sorry that’s a way to make it accessible for people to take the risk

to start a business.” When describing equity crowdfunding PlatformOwner states, “look,

I think once it’s established I think it’s pretty much of a no-brainer for the government to

get involved. Because they are mitigating risk, spreading it across, not just amongst

themselves, but sharing it across people. So it just makes sense, for the guys who are

doing it already, who have gotten onto it”. Indeed PlatformOwner goes on to propose a

match funding partnership model with government, that matches successful locally

crowdsourced campaign as they are “supporting success”. More on this is included in the

Government theme discussion.

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Unequal wealth distribution was seen as a concern by multiple entrepreneurs, as

LocalCrowdFunder2 states “my big challenge though is… that the audience was pretty

much all white, and well to do and so I really did not want to repeat that, given the

context we live in so I really worked hard. So that’s the downside of this crowdsourcing,

is that you’re only sourcing from a certain type of crowd”. PlatformOwner attempts to

make crowdfunding more accessible to lower economic classes by incentivizing

accelerators to partner with less well off entrepreneurs working on startups, where the

accelerators will take a certain % of funds raised via crowdfunding. PlatformOwner

states, “how we expand it [access to capital] even further, to the less affluent or less

connected classes, is through accelerator programs, which are cutting the hook. So, we’ve

thought long and hard about this, and we’ve come up with solutions”.

InternationalCrowdFunder1 believes that a lot of the projects and businesses on

crowdfunding platforms are not essential, and that people from developed countries will

not invest in any project unless they have disposable income. This is contrasted with

LocalCrowdFunder2’s opinion that those with less actually give more, stating “I don’t

know about SA but in North America, there’s been plenty of studies done that say people

with less money are actually more generous. In terms of the percentage of their income

that they give. And so, you know, there could be some potential around [this]”. Indeed,

the World Bank (2013) seems to agree, stating that those with incomes of over 10,000

USD per year are the target population for crowdfunding donors/investors in emerging

markets.

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4.2.1.3 Concerns

Figure 15: Concerns sub-theme broken down into codes. Original.

While similar to barriers, concerns were different in that they were more opinions of what

entrepreneurs thought held them and crowdfunding back, as opposed to actual barriers

that they faced. A breakdown of how many entrepreneurs listed each concern is listed

below.

Concerns

Opportunity Cost

Fraud

Debt Trust Issues

Failure

59

Figure 16: Concerns cited, grouped by the number of interviewees that listed a concern when speaking about crowdfunding. Original.

Trust issues were found to be the biggest concern, with five entrepreneurs mentioning

trust as a concern. InternationalCrowdFunder1 states that in emerging markets “there’s

trust issues maybe. I would imagine there would be some sort of correlation in countries

with higher crime or fraud rates, that there would be less willingness to give money to

someone because they have an idea, even if they’ve kind of proved it on a crowdfunding

page. Because if you grow up being suspicious of other people and what they’re going to

do, with money then you don’t have the trust to give to strangers so I think it’s somewhat

of a luxury good, in that sense. Or at least a luxury, a luxury to be able to give money like

that in a lot of ways. So that trust thing would be a big one.”

Debt concerns were high on the mind of LocalCrowdFunder9, stating “for my particular

project, I have been self funding, and I've been so overloaded that I've gotten into debt as

a result. So I'm looking at alternative forms, other ways of doing it”.

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Every business attempting to crowdfund was asked whether they felt lack of trust with

online payments in South Africa was a concern, as South Africa has traditionally had

slower online purchasing uptake than the developed world. The results were mixed, with

6 stating that trust in online payments was a real concern for their business, while 4 stated

that it was not a concern. A figure is shown below.

Figure 17: Are people concerned when paying online? Results listed by number of interviewees that stated each answer. Original.

Out of those that stated trust in online payments was a concern, some such as

LocalCrowdFunder3 stating “Well first of all people would rather be weary, so a lot of

what has happened is I've had family members giving me the cash, I've gone online a

number of times with my credit card, which I don't mind, and so a bit of weariness, but I

think, generally being misinformed”. LocalCrowdFunder6 states that “instinctively I'm

going to go with yes [online trust is an issue], actually I haven't thought about that at all.

But I think there is still, as a very, very sweeping generalization that identifying culturally

when it comes to technology South Africans are about 3 years behind the US”.

LocalCrowdFunder7 listed this as being their biggest obstacle when they said

“Definitely they weary. They would rather give us cash in hand then take out a credit

card, and fill in the credit card details. But that's been our biggest obstacle”.

4

6

Are people concerned when paying online?

Not concerned

Concerned

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LocalCrowdFunder4 mentioned, “I've heard that feedback myself [that people are

weary of spending online in SA]”. LocalCrowdFunder2 states, “I ended up selling

tickets by hand anyway to lots of people because they weren’t getting around. Like I

knew, they said they wanted a ticket, but they were just not doing it, and I felt like it was

a barrier, because they’re just not used to it. And it’s not the most, I mean I think it can

be, the platform of actual payment, you know, it was still in the guinea pig stage, so it

wasn’t as smooth as it could have been… and it was also challenging because people that

did have money, aren’t used to paying online”.

Those on the other side of the argument, such as LocalCrowdFunder12 stated “No, not

anymore. If someone’s got a credit card, they've surely done all that payments by now. I

don't see it as a significant”. TownshipEntrepreneur3 had his goals exceeded, and

expressed doubt that people were weary of giving online, stating “in fact, they were not,

they were not [weary of paying online], I don't want to lie, they were not, because for me,

I exceeded my target. That show's that people are willing to, people are looking for

something that's innovative yet, giving back to the community, they want to be part of

parcel that, part of parcel of what, a winning team that's giving”. LocalCrowdFunder10

also see it as safe, stating, “not really [people are not weary of donating online], it's quite

safe; your details are quite secure. So they don't really have any big issues”.

Other concerns were fraud – PlatformOwner mentioning, “one of the key issues of CF

in SA is lack of trust of SA platforms by overseas supporters. They say, who are these

hippies? Secondly, overseas banks don’t let credit cards go through. You have to phone

them and authorize it. I find it mind-boggling; credit cards go through more easily in a

bar then with TF”. However no project creator mentioned fraud as a concern.

They did, however, mention debt as a concern, LocalCrowdFunder9 stating “for my

particular project, I have been self funding, and I've been so overloaded that I've gotten

into debt as a result. So I'm looking at alternative forms, other ways of doing it”.

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InternationalCrowdFunder1 states that if they did not use crowdfunding, they would

“have tried to get equity or debt investment from elsewhere and plunk down a whole

bunch of cash on something that wouldn’t of really had a chant to validate properly”.

Finding 1A: There were many barriers to using crowdfunding, both as a project creator

and project donor. Education was found to be the most common barrier associated with

starting a crowdfunding campaign and supporting a campaign, followed by risk and

unequal wealth distribution.

Finding 1B: The majority of Entrepreneurs searched out alternative, traditional forms of

financing before moving on to crowdfunding.

Finding 1C: Local entrepreneurs are divided over whether the South African public is

weary of donating online.

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4.2.2 Government

Figure 18: Government theme and its subthemes and codes. Original.

One of the main research questions this report is seeking to find is what role, if any, the

government should play when it comes to crowdfunding. Each entrepreneur interviewed

that was seeking funds on a crowdfunding platform was asked this question. Fourteen of

the interviewees said government should have a role to play. Eight of those said they

should match funds that have been successfully crowdfunded, if the target is met, as this

is “the government supporting success”. Six mentioned the government should support

crowdfunding in some way, but did not give specifics.

Government

Competition

JOBS Act

Government's Role in CF • Social Development • Match Funding • Government Promotion of CF • Government support

SMEs • SME Development • Township Business

Natural Selection

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Five mentioned the government should promote crowdfunding. Four said there was too

much red tape and that government should cut it. One said government’s role was social

development, inclusive of crowdfunding. A visual figure of these replies is shown below.

Figure 19: Government’s Role in Crowdfunding subtheme, broken down by the number of interviewees that listed each role. Original.

When discussing the most spoken about code in this theme, match funding,

LocalCrowdFunder12 stated that “That would be nice if they could match it. That

would be nice if they offered something like yo, if you can get to a certain level, we'll

match it. That would be great. And obviously government's role is huge. They've got

bazillions bro. Bazillions and bazillions, and what else is there to invest in, especially

with social enterprises where you've got businesses that are already trying to have a triple

bottom line”. LocalCrowdFunder6 thought this would be nice for disadvantaged people,

stating “that would definitely figure, especially for disadvantaged guys that should

definitely be on the radar, yea”.

1

8

5

6

4

Government's Role in Crowdfunding

Social Development

Match Funding

Government

Promotion of CF

Government support

Cutting red tape

65

The government representative herself, Government, stated, “So we're looking at

multiple options, none of which at this point are sort of anything set in stone. But kind of

thinking about the possibility of doing a bit of financing so there would almost be a

matching, so if projects that we believe are worthy, come to the floor, then we might be

able to [invest]”. She further stated “we're really interested, from my perspective, in

looking for underfunded opportunity to go hey - you need small amount of money - and

we go how can we help those small amounts of money to generate it to those of people

that need it. So watch this space right, because we're still figuring it out - there is no

nationally mandated position at all.”

Our local crowdfunding platform is seeking to put just such a plan in place, with

PlatformOwner stating that “what we’re doing with the Department of Arts and Culture,

for example, and in this case with a bunch of others as well, is you give us $1 million that

you normally give to a whole bunch of projects, normally you’d give $1 million to 10

projects, out of those 3 will be successful, 5 will be ok, and 2 will bum out all together.

You give us the million bucks, we invest in 10 projects, and those 10 projects work like

this. They will only get the cash, when they raise a matching amount on CF. So 20

projects will apply for the funds, and all will be told that, you’ve got 1:1 up to 50,000-

100,000, and the ones that are successful and raise 50k, get another 50k, and they’re

ready to go. Government is investing in success. And they’re told two things, one, that

the project is actually wanted in the market, two, the people putting the project together,

whether it’s a craft project, or whether textile or computer project, they actually have

enough noggin to run a successful marketing campaign. If you can’t market, and the

people don’t want it, well then, it was a dud anyway. The problem is the government

can’t figure which out of those 10 is going to work [grants], so crowdfunding does it for

them. So Department of Arts and Culture looks and says, oh, we like that! More efficient

use of capital, and better returns for them.” As seen, they are pioneers in the match

funding movement, and believe greatly in it. As the government has also expressed

support, this has a real potential to shift the startup climate in South Africa.

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Others interviewed wanted government to simply promote crowdfunding and stay out of

investing directly in crowdfunding projects. LocalCrowdFunder9 says, “You know,

what I get, the spirit of CF and crowdsourcing is that I think that the major principle, is

that it's informal, it's ad-hoc, it's fluid, it's flexible. And things like government are

establishments, they're institutions, they're huge lumbering animals that take a long time

to just turn their head, let alone turn around. And what these things address is things that

are happening in the moment and you've got to have that kind of fluidity. So I don't think

- yes, endorse it, but I don't even think they'll understand”. LocalCrowdFunder10 thinks

more awareness can be created about local crowdfunding projects if the government

promotes and endorses it, saying, “They can make their role in promoting it. Because the

more - you get more awareness through this thing. However while anybody, even from

Europe, can donate to your project, you know, it's the numbers online that have access to

it - I think promoting and talking about it would be much better.” LocalCrowdFunder6

agrees, stating, “government's role should be to promote it to, to build that network. The

essence of CF is - it's a very elegant thing - you're not pushing anything people don't

want. They only participate if they want to so it should be a very valid platform for

government to be supportive of”. As will be noted in the social network theme, linking

social networks is a great way to support crowdfunding projects.

When asked what role government should have in investing in equity crowdfunded

projects, Government had a reserved stand, stating “I mean I've been to a bunch of

international Arts conferences over the last, let's say, 5 or 6 years, and CF is always been

discussed. But I'm not aware of any government as such, that invests in Kickstarter or any

of those CF platforms”.

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Very small government investments seem to be too big of a financial burden for the

return they generate, as Government stated “the fantastic thing about CF is it's almost

like taking care of the pennies so the pounds can take care of themselves, because in

essence, the more people that come on board, the more little bits of money will make a

huge difference. Whereas for us in the government respective administrators - little bits

of money is a huge unmitigated nightmare. We spend as much money administrating

R1000 as we R100,000 as we do R100,000,000. So for us to think about creating

opportunities for 30,000 bucks here, 40,000 bucks it's actually really high.”

LocalCrowdFunder4 also thought the governments should provide support outside of

fund matching and promotion by linking networks, stating “it might be like a good next

step - there's a lot of Dragon's Den of, you know maybe, I don't know if government can

pull their heads out of their - to do something like that. But even if it's sort of, they sort of

a next level, where there's maybe like Angel Investors or sort of a Dragon's Den type of

thing, that once you've made it in the CF, you sort of can go pitch to a VC or something”.

LocalCrowdFunder11 thought general investment from the government in

crowdfunding, in a non specific form, would create jobs and businesses, stating “the

government is - in SA - I mean I don’t know about other countries but South Africa there

is a huge - most people are unemployed, and, and, instead of saying - because we need to

create jobs, they should be a greater push on innovation so I think even for all of Africa, I

think we have an incredible affinity because our underdevelopment, for me, is a blessing,

because we get to create, you know, we get to craft things that haven't been done yet, or

find - at the same time learn from the rest of the world, you know, and kind of source

what's already there. So I definitely think the SA government should absolutely invest

like million in CF.”

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Finding 2A: Local entrepreneurs want a government role in crowdfunding, with match

funding and financial support being the most popular option, followed by government

promotion of crowdfunding.

Finding 2B: Administration of small amounts of government money for crowdfunding is

not financially viable for the government.

Finding 2C: Government partnerships with local crowdfunding platforms are being

discussed at the moment to get around the problem found in 2B. Support for the idea is

high amongst the majority of interviewees.

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4.2.3 Planning and Support

Figure 20: Planning and Support theme broken down into sub0themes and codes. Original.

Two key related research sub-questions were, why have previous South African

crowdfunding platforms failed, and how can barriers to running a successful

crowdfunding campaign be overcome? Planning and Support of crowdfunding businesses

where theorized to be the answer to both questions, with the researcher believing a lack

of mentorship and support on previous crowdfunding platforms in South Africa ensured

their downfall.

Planning &

Support

Entrepreneurship

Innovation

Partners • Accelerators

Planning • Preplanning • Pilot Projects • Meeting Targets •  Scaling

Rasing more than requested

Success

Support •  Initial Help • Envisioning • Creator Engagement • Mentorship • Project Acceptance

Sustainabiity

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Every local entrepreneur interviewed that has used, or is using crowdfunding on

PlatformOwner’s platform, which offers a high amount of mentorship and support, was

asked whether they felt the mentorship they received helped with running a successful

crowdfunding campaign.

Every single entrepreneur stated that mentorship did indeed help with running his or her

campaign. LocalCrowdFunder12states “They've been amazing; PlatformOwner and

PA have been amazing. And look, we've just started, but they've told me what I need, and

they've really helped put in what I've asked them to put in, in terms of like information,

so there's been a lot of effort on their side. And I think they create a very supportive

thing. And they're also quite clear on what they think will work, and what they need from

us and that sort of thing. So I think they've been great.” LocalCrowdFunder9, when

speaking about whether the mentorship has helped states “Very well. I've had a lot of

exposure to PlatformOwner and PA, they're incredibly supportive”.

LocalCrowdFunder3 states that “PlatformName has been really fantastic with regards to

supporting us and just being available, like really available, and interested in what we're

doing, and very responsive, and direct with us, and replying to emails, and giving us

encouragement, and helping to market our initiative on their platform. It's really being a

learning experience for us too. It's helped us to realize how important it is to craft your

marketing strategy really well, look to have focus, and a goal”.

TownshipEntrepreneur3 states how the mentorship was instrumental for running a

successful campaign, “PlatformOwner was important. Because really, he was, because

we had meetings, workshops, where we sit down and see how we can actually take this to

another level. But me and him and PlatformName, the relationship we had was more on

the campaign. Because we wanted the campaign to be successful”. LocalCrowdFunder8

“found them incredibly enthusiastic, I have to acknowledge that this is us launching right

now, real time, so I don't know much to reflect on, apart from the process of getting us

here. And I found, you I know PlatformOwner from before and his new, his staff that

I've met, or his colleagues, they've been really enthusiastic and wonderful about the

process. Very, very encouraging”.

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Others stated the mentorship also helped them envision and develop their business idea,

and plan things out from the beginning. One creative project with no previous business

experience, LocalCrowdFunder11, stated that “It's been amazing, because first of all, if

you're a creative and you haven't really been an entrepreneur, there's certain things you

don't think about, and so, basically CF kind of - when you apply, they give you lots of

things to think about and they say, what's your first milestones? You know, what you

gonna do when you get so much money. So they give you goals, and you have to think

about what are you goals and how do you want to publish this, and how do you want to

develop the time, if you're afraid of most things. Sometimes you don't know how to think

to carefully about other ideas, about, you know, selling, you know, kind of get your

product out there. And so they really help you think about those fine details that you

would want their experience. And interface, by writing those things when applying, it

also helps you to envision”.

Some, like TownshipEntrepreneur3, described the support received from

PlatformOwner as instrumental to building new networks that helped their business

succeed, stating “everything that I was doing, he was involved, you understand. He was

involved as well in connecting those people?” LocalCrowdFunder7 also had a similar

experience, stating, “well yes, they've [PlatformName] been very encouraging. They've

helped us with developing the network” This subtheme of linking networks is further

discussed in the following Social Networks theme.

Planning before a crowdfunding campaign linked into the support and mentorship for

many interviewed, with the majority having planned thoroughly with PlatformOwner

before launching. LocalCrowdFunder4 recalls that “they've [PlatformName] given us

quite a lot of sort of guidelines to look for, forms, and things that actually guide you

through step by step through the structure, the whole image. Structure your video, which

was a nightmare for me, like videoing myself is not a good look. And then there's

packaging, and you know, all your descriptions, and packaging extensions for different

tiers and stuff like that so - so it's been - they've got quite a lean sort of structure and they

lead you through the process, and submit it, and they give you feedback, and say, great”.

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One interviewee, InternationalCrowdFunder1, that did not have mentorship or

platform support still stated that planning and going through different scenarios of what

could happen was instrumental to their success in raising funds on Kickstarter. They

raised 11 times more than the $30,000 USD requested for a production run of their

product. When speaking about any potential problems faced by the business now that

they’ve raised much more than requested InternationalCrowdFunder1 explains that “I

would say in our case it doesn’t create any problems. It creates maybe, potentially, a little

bit more pressure to do a good job, but we put a lot of time into setting things up,

basically planning for success, which I think is something that a lot of crowdfunding

campaigns don’t actually do”. His business partner InternationalCrowdFunder2 agrees,

saying, “I think we’re in the minority not having scaling problems. A remarkable amount

of Kickstarter or crowdfunding campaigns seem to not work through all the various

scenarios, so like, we were planning for scenarios like, what if we are on track to not even

make our 30k target. Right through to what do we do if we make 10 times the target”.

4.2.3.1 Crowdfunding Success in South Africa and Mentorship

It was theorized that current and previous crowdfunding websites in South Africa, such as

StartMe and FundFind have produced a large number of unsuccessful crowdfunding

campaigns because they offered no mentorship and support. Indeed, some platforms have

completely seized to exist due to their failures, such as crowdfunding.co.za (Neville,

2011). Local businesses and entrepreneurs stay away from the large international

platforms, with a previous study showing that only 1 in 151 backers on Kickstarter come

from South Africa, and no projects based in South Africa were funded. (Onofre & Jesus,

2013). A more recent article shows five South African projects seeking funds on

Kickstarter (CapeTownActiva, 2013). Compare this with the 96 current projects listed on

South Africa’s three main crowdfunding platforms: FundFind, StartMe, and

PlatformOwner’s PlatformName.

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A study of how many projects have successfully been funded on these sites is shown in

the following figures.

Figure 21: FundFind success rate out of 23 total projects. Original.

Figure 22: StartMe’s success rate, 46 total projects.

6%

29%

0% 41%

24%

FundFind Success Rate

Funded

Open, no funding

Open, partially funded

Failed, partially funded

Failed, No Funding

22%

41% 5%

4%

28%

StartMe Success Rate

Funded

Open, no funding



Failed, No Funding

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Figure 23: PlatformName’s success rate, 27 total projects. Original.

As is clearly shown, PlatformName has the greatest success rate. Of closed projects, 78%

received at least the minimum funding they seeked, if not more. It also has zero projects

that are open with no funding, and zero projects that failed to get any sort of funding, in

stark comparison to the countless projects on FundFind and StartMe that have no

funding. When quizzed on why this was, PlatformOwner stated “it’s huge [the success

rate], but that’s because… yesterday one of the projects, after 5 days, they’re on zero, so

PA just send’s them a message, saying “hi, your project’s at zero, it’s not good for you,

and it’s not reflecting well on where you’re at, we’re taking it down”. It’s called sticking

a firecracker up someone’s…”

58%

0%

29%

13%

0%

PlatformName Success Rate

Funded

Open, no funding



Failed, No Funding

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In addition, not all projects that apply to crowdfund on PlatformName get approved, as

PlatformOwner states “240 [have applied], 22 have gone live right? But that’s not

because we’re saying, sorry, you’re not good enough, with each project, it’s if the project

is not right for crowdfunding, we’re just saying… don’t waste your time with asking for

submission or whatever, there are other channels you can look at”. Indeed, a key channel

of support is partnerships, as PlatformName will send a project that is not yet ready to

start a crowdfunding campaign to its accelerator partners, who will help flesh out the

business concept and get it ready for crowdfunding, in return for a 10-20% cut of funds

raised, once the project has crowdfunded. Thus accelerators and incentivized to help

grow small businesses, and to help launch a great crowdfunding campaign.

While such a model is currently very successful in South Africa, PlatformOwner states

that the mentorship and support currently offered by PlatformName is “unsustainable at

the level we’re doing it at. We’re working at 5% commission for NGOs, 7% for standard

business, and at those kind of levels, you could never offer that kind of level of support

we’re offering now, but we know it’s needed, so we gota figure it out. So what we’re

doing, is we’re building a network of partners around us that provide those services”. The

scalability and sustainability of this model rests on the ability to partner up with the right

accelerators and people.

Only 13% of projects have failed to receive funding on PlatformName. This is an

amazing rate, as Kickstarter, the world’s largest crowdfunding platform, has a 58%

failure rate (“Kickstarter Stats — Kickstarter,” 2013.).

PlatformName is also the only platform out of the three that offers extensive mentorship

and support. The researcher found that every project interviewed that used PlatformName

listed the mentorship from PlatformName as helping in their success.

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PlatformOwner stated that the reason previous crowdfunding platforms in South Africa

failed was because “they didn’t understand the basic principles of crowdfunding. That

technology is not the platform. Technology is like having a car, without having someone

know how to drive it. You build a car and you say, yea, look we can deliver goods. No

you don’t – you actually need to know how work the damn thing, plus the rules of the

road. Whereas we, what we looked at as crowdfunding, we said, crowdfunding works

when you active your audiences, so you gota educate you’re project creators about

engagement, with their funders”. With PA adding “That’s the whole mentorship that

really distinguishes PlatformName”.

LocalCrowdFunder4 supports this view, and states that “When I pitched my stuff at

PlatformName, I was a bit sort of, I didn't really want all that stuff - because I had done a

Kickstarter thing just as an experiment a couple of years back, spit out your stuff, and

stick it out there, there's like no - no real guidance or, you know, you sort of make your

[unintelligible] in the moment. Actually I think the PlatformName thing is really good,

because you get a lot of help structure.”

Finding 3A: Mentorship and support has helped locally crowdfunded businesses succeed

in reaching their funding targets.

Finding 3B: PlatformName’s innovative model of mentorship and accelerator

partnership is responsible for it’s very high 78% success rate. South African platforms

that do not offer these services have significantly lower success rates than PlatformName.

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4.2.4 Social Networks

Figure 24: Social Networks theme broken down into sub-themes and codes.

Social networks are intrinsically linked to crowdfunding, as crowdfunding in itself is a

way of sourcing financial capital from extended social networks. The codes comprising

this theme speak to how crowdfunding enables community and social network building,

and how a social network can be leveraged to create success in those businesses engaging

in crowdfunding.

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4.2.4.1 Activating the Crowd

Different ways of leveraging the crowd, or social network, were found to be beneficial to

businesses engaging in crowdfunding. One of these ways is getting prelaunch idea

validation. Social networks can be used to increase the quality of crowdfunded projects

online. Through a process of vetting, social networks can be leveraged to supply business

idea validation and support before the project even begins crowdfunding, enabling a

greater success rate.

PlatformOwner explains how this vetting system would work, stating “You’ve got a

project for the photography exhibition, we have 1000 people that have agreed to be

vetters… to be a vetter, anyone can be a vetter, and you just have to say I really know

about projects in the photography side, and I would like to be a vetter...you do a couple of

gauges to get an idea on whether this person actually has any experience in that field. 10

projects come, and then 3 are photography, those 3 projects you send through to a group

of 20 vetters, all of them who’ve said they’re interested in photography, those vetters, all

they need to do is give their yes, maybe, no, whether they like it or not, and if they want

to, the reasons why”.

“What you’re doing there, is you’re saying, look, no one person should have the yes, this

is defiantly going live, and you’re not saying, because those 20 said no, you can’t go up.

You’re saying, out of those 20, 18 of them really love your idea, and it’s awesome, and

you really got your casting right etc, and two of them said nah, hate your stuff – you got a

good chance of going live. If 18 of them said this idea sucks, and you’ve got no chance,

at least you go with your campaign if you want to carry on, understanding that’s going to

be a hard sell. With those 20 though, out of those 20, there’s likely going to be a couple

who really understand your topic, I might not know a lot about photography, and when

you say it’s going to cost R30,000 to get an XV 20 camera, and it actually only costs

10,000, I wouldn’t pick it up. But someone who knows their stuff in photography would

say, hang on, dude, seriously? What are you doing this now?”

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InternationalCrowdFunder1 explained how using crowdfunding enables businesses to

acquire customers and a social network right away, and in essence validating the idea. He

stated “why not get that [money] from people who actually love your product, so you’re

getting customers right from the start.”

TownshipEntrepreneur1 believes that crowdfunding can be used to sell direct to

customer, building a more personal relationship. He states that “that’s the whole idea,

that’s the whole thing. Not to be in Woolworths. For me, as a manufacturer and a

wholesaler, not to go and sell to Woolworths, no. But to sell to individuals, all over the

country”. PlatformOwner

4.2.4.2 Linking Communities

The most important finding from this theme was that crowdfunding itself is a way of

linking together diverse social networks, allowing for personal connections and sources

of capital that were not available to a business owner without crowdfunding.

LocalCrowdFunder2believes that social networks and relationships are much more

important than money, and “that really - and not just, yea, social networks, definitely,

social networks, not just two people who have money, but just two, you know, it's

relationships that make the world go around, not money, it's really relationships, and for

me the biggest shock that I've had coming her in SA, is seeing how many barriers there

are to, or how you know the, the country is so divided on racial and economic lines the

only ways those lines are going to be blurred is that people make a conscious effort to

recognize the resources that they inherently have because of their race”. If communities

could be linked and reorganized, the potential is massive in this country.

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PlatformOwner believes that crowdfunding is a way of building these diverse networks.

He states that “the social impact in this [crowdfunding] is going to be absolutely massive.

Because you’re going to cross over and build communities, it’s not Woolworths or

whatever big retailer agent coming and saying, here’s your stuff, this is your offering,

you pay us, we take your money, and we bugger off. It’s a, here’s my idea, speaking

directly to your audience, if you like it, you’re going to back me, we’re going to form a

community together, and from here we’re going to work forward together, so you do

another campaign. So you’re actually actively getting people together to form groups,

where they engage with each other, from different backgrounds and stuff, over something

that they like altogether”.

LocalCrowdFunder11 commenting on her experiences crowdfunding stated that “it's

been a lot of platform to meet, a lot of people that money can't buy you know… amazing

social connections, you meet like just the right person. Even today, I just met incredible

people, the sort of people I would of wanted to meet, that I just didn't know where to

meet them. And I just kind of found them over here.” As we can see, the relationships

built and the people met were more important to her than the money raised. Speaking

about PlatformName’s network building she states, “I would imagine that maybe they

would have more people to - the more they do it, the more they know how to connect

various things”.

TownshipEntrepreneur3, a previously disadvantaged person, who raised double what

he asked for to expand his township business states that “PlatformOwner was involved

as well in connecting those people… he was very, very close to it, and that is the reason

why it went well, because part of, I would say 70% of the backers came from the side of

PlatformName, you understand, so that helped me a lot”. LocalCrowdFunder7 stated

that “they've [PlatformName] been very encouraging. They've helped us with developing

the network”.

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LocalCrowdFunder6, when speaking about his biggest problems, stated that “marketing

was my biggest problem; this might be a good way to get a broader reach. You know,

you're networking, you're leveraging somebody else's network, as well as your own, so

for me the big appeal was the marketing”. Using the extended network he has build

through PlatformName was a way to increase the marketing, and hopefully success of his

product.

4.2.4.3 Community

Community was a code that was widely used in different contexts.

TownshipEntrepreneur3 thinks crowdfunding is about giving back to the community,

stating “people are willing to, people are looking for something that's innovative yet,

giving back to the community, they want to be part of parcel that, part of parcel of what,

a winning team that's giving, you know, because the concept itself, you are not about, it's

not about me.

PlatformOwner thought it was a way of engaging the community, stating

“crowdfunding is about getting off your tush, and doing it for yourself, and showing what

you want to do has the support of the communities around you”.

LocalCrowdFunder8 believed that by crowdfunding a project, the impact it has on a

local community is greater than by traditionally funding it. When speaking about his

project, he stated, “[my] particular project is one that tells a story. I think a story is

community based - you know, it needs to be heard; it needs to be kind of amplified. It's

not a secret; it's not something that has its value in intellectual property. It actually has its

value in its connectivity; it's a common, common cause. It kind of taps into an aspect of

us that we all recognize”.

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Finding 4A: Social networks can be leveraged to increase the chance of a crowdfunding

project meeting its funding goals, via vetting and direct non-financial support from the

crowd.

Finding 4B: Crowdfunding can be used as a way of linking together disconnected social

networks, and creating new communities that enable access to new people, relationships,

and sources of capital.

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4.2.5 The Why and the How of Crowdfunding

Figure 25: The Why & How of Crowdfunding theme broken down into sub-themes and codes. Original.

A key question asked to every entrepreneurial venture that used crowdfunding was why

they choose to use crowdfunding for their project? Tied in with this question and theme

was what type of crowdfunding they used, with all interviewees stating that they used

rewards based crowdfunding. No local examples of businesses using equity

crowdfunding exists, however the research attempted to contact businesses using this

form of crowdfunding in the United Kingdom, where it is legal, to no success.

Responses were varied, from the traditional answers of raising capital and market

validation, to unexpected answers such as marketing and creative control. A figure of the

different responses given is shown below. It is noted that respondents usually chose more

than one reason, with for example, marketing and validation co-occurring 4 times.

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Figure 26: Reasons for crowdfunding, and number of interviewees that chose each. Original.

4.2.5.1 Marketing

The biggest reason for using crowdfunding was found to be marketing with 9

entrepreneurs giving this reason, followed closely by financial need with 8 choosing this

reason. This came contrary to the beliefs of the researcher, who felt financial need was

the biggest reason companies choose to crowdfund.

LocalCrowdFunder10, a charitable foundation seeking funds, explains that “with the

Internet it's much better than going door to door. Anybody can access it - from your

phone, at work, and from home, most people. So it's much easier for a lot of people, and

you can just share the link on Facebook and twitter. So the word spreads much quicker

than us going door to door”. LocalCrowdFunder6 states that the main reason that he

uses crowdfunding is “for me personally it's more for marketing, although I think that's

from a rather unique perspective”, going on to state that “when PlatformName launched,

I thought you know what. Marketing was my biggest problem; this might be a good way

to get a broader reach. You know, you're networking, you're leveraging somebody else's

network, as well as your own, so for me the big appeal was the marketing”.

2

8

9

2

7

1

1

Why did you decide to use crowdfunding for your project or

business?

PR

Financial Need

Marketing

Employment Creation

Validation

Business Expansion

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LocalCrowdFunder9, when asked whether marketing was a reason he was

crowdfunding, stated, “Yes, my project is very sociable anyways, because my project

involves generating conversations. That's literally what the performance is about, so it

seemed to work, it seemed to mesh very well with the basic principles of crowdfunding”.

LocalCrowdFunder4 states that the crowdfunding process “[is] a good marketing

exercise. I can get a lot of marketing just from the system, and events like this, the

website, all the marketing, the mailing, and all that stuff”.

LocalCrowdFunder8, when speaking about reasons for crowdfunding, mentions that

“you can have a good idea, but if you don't have the platform to tell it, or allowing that

megaphone, that digital megaphone to get it out there, it just gets lost in the attention

span. Everyone's a web designer now, everyone's got a story to tell, everyone's personal,

everyone's story or holiday photos are on Facebook. How do you compete? How do you

get some potential”? Here we see that a good “digital megaphone”, such as a popular

crowdfunding platform, can get the marketing message out there to the interested

population.

4.2.5.2 Financial Need

LocalCrowdFunder5 crowdfunded “because we had no money”.

LocalCrowdFunder10 used crowdfunding because of the inherent ability to raise a lot of

money from little donations, stating “we could do from as low as R100 from a normal

person in the community. So it's more accessible for everyone”. LocalCrowdFunder3,

also a charity, stated the same, saying, “we are an NGO in the making, and we need

significant funding to kind of make us sustainable. But we felt that by breaking down our

goals into smaller chunks and then trying to raise a certain amount of money through TF,

would help us to get the business going”. LocalCrowdFunder7 was also low on capital,

stating, “well basically, we sort of ran out of money, and we need enough money to make

a copy [of our pilot episode]” as his reason for using crowdfunding.

LocalCrowdFunder9 also needed to raise money, but thought it was a better approach

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then others, stating, “it just seems to be a far more human approach to generating money.

It's got a very strong social dynamic and it seems a lot kinder than traditional established

forms. So for me, it's a more futuristic, forward thinking way of generating money”.

LocalCrowdFunder10 sought out traditional financing, but failed, saying, “we did, we

still are in the process as well [of looking for traditional investors], we've had some say

maybe and some say no. So that's the other reason we decided maybe it is something

[crowdfunding] we should try as well”.

InternationalCrowdFunder1 mentions three reasons for using crowdfunding, “one,

marketing – it’s a – both in terms of people, users all over Kickstarter just looking for

stuff to buy, Kickstarter will help you market stuff if they like you, and you fit with their

ethos because they want to look good as well. But also in a secondary way, because the

media is in love with Kickstarter and crowdfunding, and they’ll be looking for a nice

story, were you have raised all this money in 30 days – and that’s a very easy headline to

write. Second one is validation, you can be very ambitious with your program plans

without having to lay down stacks of cash and not know if people are actually going to

buy it – as you’re preselling it. And the third one is money”.

4.2.5.3 Validation

Business idea validation scored very highly on reasons to use crowdfunding in this study,

with 7 entrepreneurs listing this as a reason. The ability to quickly, and without wasting

much time or money, see whether you can generate enough interest and potential

customers, allows entrepreneurs to discard ideas without support before countless hours

and dollars are spent on the idea. Those that are validated are much more likely to

succeed, as there is a customer base that has already pledged to buy the product or

support the project.

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Government mentions that, “it's so important that we use the opportunity with something

like PlatformName to test your ideas through the market, to listen to what the market is

telling you, but also then to transform your business ideas as your familiarity, as your

interactions with the market, change your self and your project idea”.

When LocalCrowdFunder1 was speaking about Mark Shuttleworth’s failed attempt to

crowdfund millions for a smartphone, he states “look at the value now, he’s now

conducted market research that’s a fraction of the price – for nothing”. It would have

been much pricier to find out that no one wants your product after it was already

produced. In this way, the business idea is validated before anything is actually created.

He continues, saying “it ties into what’s happening now in terms of your concept of the

lean startup, where, you know, the concept of fail fast, so if your thing doesn’t work

that’s going to give you a great indication – ok cool, it’s not going to work, fine. You

haven’t gone and wasted everybody’s time and money and energy, you know on

something that’s not going to work”. LocalCrowdFunder12 puts it nicely when he says

“if you all believe in it [his business idea], put your money where your mouth is, if you

don't, that tells me something, and I won't waste my time”.

PlatformOwner states that “that’s where crowdfunding in itself is so fantastic. It’s

literally, like right, ok, I believe I can at least deliver a reward on this, and if only means

that I need to produce 100 of these methane producing things because that’s what’s been

paid for, I produce 100 and figure out whether the business model works, and if it

doesn’t, like I said, ok, I’ve given my 100, I’ve paid everyone back through the product”.

Further commenting on whether this was in essence business idea validation, he stated

“that’s one of the reasons I think rewards based crowdfunding is what I call appropriate

crowdfunding, and why it’s the model we went for here, rather than loan”, implying that

yes, the model he alluded to is in essence validating its business idea by engaging in

crowdfunding.

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After speaking to interviewers about why they used crowdfunding, the researcher asked

whether they would use the platform again. Out of 9 asked, 8 said they would indeed use

crowdfunding again. InternationalCrowdFunder2 actually said they would consider

using equity crowdfunding, after their successful campaign on rewards-based Kickstarter,

stating that “I think if we were looking to raise equity I would definitely look at equity

crowdfunding options”.

The researcher asked nine entrepreneurs that used, or were using crowdfunding, whether

they believed that after a successful crowdfunding campaign they would receive more

investor interest, from traditional investors such as venture capitalists and government.

Eight believed that yes, they would garner further investor interest after a successful

campaign. A figure is shown below.

Figure 27: Do you believe crowdfunding will lead to further investment interest in your business? Results broken down by number of interviewees. Original.

Only one business stated that they actually had experienced further investor interest post

launch, this was likely because all the entrepreneurs interviewed had just finished their

crowdfunding campaign, or were just starting.

8

1

Do you believe crowdfunding will lead to further investment interest in your business?

Yes

No

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4.2.5.4 Traditional Crowdfunding

Traditional, cash based, offline crowdfunding has existed in Africa for many years. It is

not a new concept; it relates with the African Ubuntu philosophical point of view that “I

am because you are”. Interviewees touched upon this subject, with some asking how it

could be leveraged even further into the non-cash domain. Government for example,

stated that “the other thing you might find to be very true in the rural areas is that there is

a way of banking in and around bartering. Whereas somebody will, and if they've made a

very interesting project that runs in the Alexandria Township environment, where people

- essentially you're looking at your houses to become art galleries. They get a small

revenue from it… so you might find that there's more traction in giving other than cash”.

In addition to bartering, there is also a traditional form crowdfunding evident in rural

Africa. LocalCrowdFunder9 states that “there's things like, what is it called...Lulolo.

Where they work, and they give a whole bunch of money each month into a kitsi, ok.

And then once, and every month one person takes that whole kiti. So there are structures

that are partly more of a structure of working money that are very local…just as a way, so

that each person can have a lump sum of money every now and then. Like suddenly,

you’ll get a whole lot of cash…[it’s] totally community based. So it's community sorting

itself out. Developing systems for itself”.

LocalCrowdFunder2 spoke about offline crowdfunding in Cape Town, when discussing

a charity that is about to go under, that is seeking funds to stay alive. She stated “the

whole organization is spending the entire month crowdfunding, not using a platform, but

just going out to the streets, and like trying to see if, they're basically saying, it's up to

SA, it's up to Cape Tonians, if you want to support our organization or not, and we're

going to die if you don't”.

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Government speaks about a similar rural system, stating “we have a version of

crowdfunding…essentially, at its simplest level, a bunch of women will get together and

each contribute an amount of money so they can go bulk grocery shopping at the end of

the month. So we can buy 50 cabbages from the market at a much cheaper price than I

can, you know - which is technically crowdfunding at its very lowest level”.

Finding 5A: Crowdfunding is locally suitable for a variety of businesses and projects, as

shown by the variety of successful projects on PlatformName.

Finding 5B: Marketing was the top reason for using crowdfunding locally, followed

closely by financial need and market validation.

Finding 5C: A majority of entrepreneurs interviewed stated that they would use

crowdfunding again.

Finding 5D: A majority of entrepreneurs thought that they would garner further

investment interest after a successful crowdfunding campaign.

Finding 5E: Traditional, cash based forms of crowdfunding already exist in Africa, and

have significant traction.

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4.3 Research Criteria Evaluation

4.3.1 Credibility

The researcher thoroughly reviewed the audio recordings of the interviews, and re-

listened to each interview in its full context at least three times, more for those that were

hard to understand. Where there was doubt on which word was used, the researchers best

guess of the word was placed in a bracket in the transcript to express uncertainty.

Unintelligible words and phrases were listed as [Unintelligible] in the transcript. The

researcher provided interviewees with a list of written questions if they asked for it, but

did not do it automatically as the spontaneity of the answer would have been diminished

had the interviewees had access to the questions before hand. When the interviewee did

not understand the question, every effort was made to re-ask and rephrase the question to

the interviewee until he or she understood.

4.3.2 Transferability

The research findings are general enough that they are transferable to any emerging

market that faces the same socio-economic issues South Africa does. The majority of the

findings would not be transferable to developed markets, as they lack the issues that

emerging markets have, such as lack of Internet connectivity, formal banking, and low

consumer trust.

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4.3.3 Dependability

All raw data sources have been stored on a hard drive, and in the cloud. These include the

audio interviews in m4a format, interview notes in docx format, transcribed interviews in

docx format, coded interviews in docx format, and on the cloud in Dedoose format under

a Dedoose user account. The research methodology, along with these raw data sources

will be stored together, and access will be granted to all future researchers to use it as

they please.

4.3.4 Confirmability

The researcher allowed information to emerge from the thematic analysis by itself, and

maintained his objectivity. Due to the time limits, a second, impartial opinion of the

findings was not performed. If there are future concerns around confirmability, an

external data audit can be performed

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4.4 Research Limitations

The research was limited to 19 interviewees, of which 18 were local South Africans.

Only one local crowdfunding platform was interviewed, out of the three that exist. This

was done deliberately, as this particular platform had the highest success rate, and the

researcher was attempting to find out what enabled local success on such platforms. No

equity crowdfunding businesses or platforms were interviewed, despite the researcher’s

best efforts to do so, and none exist in South Africa.

While conducting the thematic analysis, the researcher was mindful of the five pitfalls

described by Braun & Clarke (2006), namely;

1) Failure to actually analyze the data at all. The data presented was analyzed by the

researcher instead of just displaying excerpts from interviews. A

2) Using of the data collection questions (such as from an interview schedule) as the

themes that are reported. Themes were constructed around similar codes, and not around

research questions.

3) A weak or unconvincing analysis, where the themes do not appear to work. The

themes created were cohered a central idea, with subthemes clearly being identified when

appropriate.

4) A mismatch between the data and the analytic claims that are made about it. Every

effort was made to make sure analytical claims were grounded in data and not merely the

researcher’s opinion.

5) A mismatch between theory and analytic claims, or between the research questions and

the form of thematic analysis used. The thematic analysis used was appropriate for the

research question asked and the theory used.

94

The researcher has reviewed his data and findings in the context of the pitfalls set out by

Braun and Clark (2006), and is confident that the research avoids the five pitfalls listed.

95

SECTION 5: RESEARCH CONCLUSIONS

The researcher attempted to answer four questions throughout the report.

Firstly,

1) What is the potential of crowdfunding in South Africa for creating employment?

Through interviews and prior research on funding milestones, it was discovered that local

entrepreneurs were able to create additional employment after successful crowdfunding

campaigns, or pledged to do so if they met their targets. The researcher found various

examples confirming this on the PlatformName, including

• Crowdfunding enabled township entrepreneur to purchase bicycles and hire extra

staff for his business expansion

• InternationalCrowdFunder1 is considering hiring more people to handle their

PR after a successful campaign

• A successful campaign would mean LocalCrowdFunder7 continues working on

his TV show, and hire staff to produce a full season

• Crowdfunding helped employee a musician in cape town in

LocalCrowdFunder2’s case

• LocalCrowdFunder7 will employee Xhosa teachers and production staff to

produce educational videos if his campaign is successful

• LocalCrowdFunder10 will be able to hire production staff for more episodes of

her crowdfunded TV show if her campaign is successful.

• LocalCrowdFunder9 would be able to hire additional instructors to spread his

message of educational reform.

• LocalCrowdFunder3 would be able to hire a full time educator for their after

school program if they meet their milestones.

As the data and analysis has shown, local entrepreneurs use crowdfunding for various

reasons including raising financial capital, which for the projects listed above would

enable these entrepreneurs to employ additional people other then themselves to the

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project or business. This research question has been answered; crowdfunding can clearly

create employment opportunities in South Africa. This is the same view the World Bank

(2013) has expressed. The employment created may be on a small scale as of right now,

but crowdfunding is only just beginning to take off in South Africa.

Sub Question 1:

- Why have so many crowdfunding platforms failed in South Africa?

The findings have shown that mentorship and support plays a pivotal role in ensuring the

success of a crowdfunding campaign. All projects interviewed on PlatformName stated

that mentorship was beneficial to their success. Through a quantitative analysis, the

success rate of the 3 main crowdfunding platforms in South Africa was calculated.

PlatformName had by far the highest success rate, at 78%. PlatformOwner stated that the

mentorship and support accounts for such a high success rate.

No such mentorship, partnership, or support is provided by the other two platforms,

FundFind and StartMe. They also accept any project that applies, something that

PlatformName does not, taking in only 10% of those that apply that are deemed

appropriate for crowdfunding.

This research question has been answered; the reason crowdfunding platforms have failed

in South Africa is two-fold, firstly due to their lack of listed project mentorship and

support. Secondly, there is no screening process in place and every project that applies is

accepted.

The model listed by PlatformName of mentorship, support, and screening ensures it’s

continual success.

Sub Question 2:

- What are the barriers to running a successful crowdfunding campaign in

South Africa, and how can they be overcome?

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Before discussing what the barriers to a successful campaign was, it is noted that

marketing, financial need, and product validation were the biggest reasons local

entrepreneurs used crowdfunding. Understanding why people crowdfund is the first step

to understanding how to run a successful campaign. A figure of this is shown below.

Figure 28: Reasons for crowdfunding, and number of interviewees that chose each. Original.

The findings show a variety of barriers to running a successful crowdfunding campaign.

They are broken down in the following figure.

2

8

9

2

7

1

1

Why did you decide to use crowdfunding for your project or

business?

PR

Financial Need

Marketing

Employment Creation

Validation

Business Expansion

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Figure 29: A breakdown of how many times each barrier was mentioned through all interviews. Original.

Education is seen as the largest barrier to running a successful campaign, followed by

risk and unequal wealth distribution amongst the population. As 78% of campaigns on

PlatformName have been successful, which is larger than FundFind’s 8.3% success rate,

and StartMe’s 40% success. It is also much higher than Kickstarter’s 42% rate, which

operates in a developed market.

It was found that crowdfunding can be used to link diverse, disconnected social networks

together, creating new communities that enable access to new people, relationships, and

sources of capital. It is assumed PlatformName’s model of mentorship, support, network

building, and accelerator partnerships is responsible for this success rate. PlatformOwner

states that this is the case from his experience, and the success rate appears to corroborate

his view.

This research question has been answered, common barriers have been listed, and

PlatformName’s model of support has been identified as a way of overcoming these

barriers.

99

Sub Question 3:

- What role should the government play in enabling crowdfunding in South

Africa?

All entrepreneurs surveyed stated that government should have a role to play, along with

PlatformOwner and the government representative herself. What role it should have

differed, with the most commonly cited answers shown in the figure below.

Figure 30: Government’s Role in Crowdfunding subtheme, broken down by the number of interviewees that listed each role. Original.

1

8

5

6

4

Government's Role in Crowdfunding

Social Development

Match Funding

Government

Promotion of CF

Government support

Cutting red tape

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Match funding was seen as the top role for government to play in crowdfunding. In this

model, the government matches whatever amount of capital has been raised by a

crowdfunding project. PlatformOwner and Government have listed an interest in forming

this sort of partnership. However, which projects are qualified to receive the match

funding, and how it is to be implemented are still ongoing questions.

Promotion of crowdfunding by the government was the second most cited response, after

financial support. In this way, government could assure its people that crowdfunding is

safe, regulated, and backed by the government, easing fears about investing online.

The cutting of red tape by government was also mentioned, with the government being

asked to streamline regulations.

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SECTION 6: FUTURE RESEARCH DIRECTIONS

There is currently very little, if any, practical research on crowdfunding in emerging

markets. The World Bank’s (2013) report was the first academic piece of literature on

this subject within an emerging market context.

While the researcher found that crowdfunding was indeed responsible for job creation in

South Africa, this was over the short 3-month existence of PlatformName. A future

research report could look into whether successful campaigns on PlatformName that

promise to increase employment, actually do, and by following up with the companies

listed in this report. A long term study could look at success rates of these crowdfunded

businesses, and compare them with the national average for small businesses to see if

there is an inherent advantage to crowdfunding over other forms of capital raising,

including bank loans and equity sell offs.

A different sample group can be used, and the research repeated. Sample populations can

be segregated into categories such as art projects, technology projects, and research can

be conducted into whether one category creates more employment than the other. Once

large quantities of projects and businesses are crowdfunded in South Africa, quantitative

methods can be used. Sample groups can also be split into geolocational categories, such

as township businesses, inner city businesses, and so forth, and the research repeated to

obtain answers on whether where you come from affects your crowdfunding success.

The potential crowdfunding has for emerging markets is massive (World Bank, 2013). It

is just starting to be embraced by the South African population. With many millions more

getting access to Internet and formal banking, the future looks bright for crowdfunding in

South Africa.

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APPENDIX 1: SIX INTERVIEW QUESTIONS FOR ENTREPRENEURS

1) Why did you decide to go with crowdfunding for your project?

2) Did you have any sort of problems convincing people to pledge money online?

3) Did you look at any other sort of financing before going with crowdfunding?

4) How has the experience been ? Did the mentoring help?

5) Have you had interest from investors now that you’ve successfully crowdfunded?

6) What role should the government have in promoting crowdfunding

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APPENDIX 2: TABLE OF CODES AND HOW THEY RELATE TO THEMES

All sub-codes assume their parent code theme, unless otherwise specified.

Code Subcode Theme Alternative Financing Barriers & Accessibility Grants Disapora Bartering International

Donors

Arts & Creativity Why Crowdfund & How? Creativity Arts Artists Musicians Barriers Barriers & Accessibility Lack of

Philantrophy

Barriers to Capital Culture of

Entitlement

Disposable income Ease of use Education Internet

Connectivety

Lack of Education Accessibility Mindset No Guidance Poverty Risk Secrecy Concerns Value Wealth

distribution

Community Social Networks Relationships Linking Social

Networks

Community

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Expectations Social Networks Competition Government Concerns Barriers & Accessibility Opportunity Cost Fraud Debt Trust Issues failure Concerns of Paying online? Barriers & Accessibility No Concern of Paying Online Yes, Concerned with paying online Criticisms of CF Barriers & Accessibility Fees Materializing

Giving

Crowdfunding Advantages Activating the Crowd

Social Networks

Vetting Customer

Aquisition

Direct to Consumer

Crowdfunding Platforms Kickstarter Crowdfunding Types Why Crowdfund & How? Traditional forms of Crowdfunding Cash Rewards Based

Funding

Donations based platform

equity crowdfunding

Delivery Did Mentorship help? Planning & Support No, menorship

didn't help

Yes, mentorship helped

Entrepreneurship Planning & Support Financing Barriers & Accessibility

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Funding Gap Barriers & Accessibility Further interest from investors post Campaign?

No, no further interest shown from investors

Why Crowdfund & How?

Believes will lead to further investors Believes it will not lead to further investors Yes, further interest shown from investors Government Government Government in CF Social

Development

Match Funding

Government Promotion of CF government Planning & Support Red Tape Innovation Planning & Support Investment Barriers & Accessibility minority shareholders

Barriers & Accessibility

JOBS Act Government Looked at Alternative Funding? Barriers & Accessibility No, did not consider alternative funding before

CF Yes, looked at alternative funding before CF Mobile Money Barriers & Accessibility Natural Selecton Government Partners Planning & Support Accelerators Planning Planning & Support Preplanning Pilot Project Meeting Targets Scaling Platform Competition StartMe Potential Raising more than requested Planning & Support Reason for Crowdfunding Why Crowdfund & How? PR Financial Need Marketing

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Needs Employment

Creation

Validation business

expansion

creative control SMEs Government SME development Township Business South Africa Failed SA CF

Platforms Planning & Support

Strategy Success Planning & Support Success Rate Planning & Support Planning & Support Initial Help Envisioning Creator

Engagement

Mentorship Project

Acceptance

Sustainability Planning & Support Would use platform again Why Crowdfund & How?

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APPENDIX 3: TRANSCRIBED INTERVIEWS

Please contact the researcher at [email protected] for transcriptions of the

interviews.

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APPENDIX 4: COMPLETE RESEARCH FINDINGS

Finding 1A: There were many barriers to using crowdfunding, both as a project creator

and project donor. Education was found to be the most common barrier associated with

starting a crowdfunding campaign and supporting a campaign, followed by risk and

unequal wealth distribution.

Finding 1B: The majority of Entrepreneurs seeked out alternative, traditional forms of

financing before moving on to crowdfunding.

Finding 1C: Local entrepreneurs are divided over whether the South African public is

weary of donating online.

Finding 2A: Local entrepreneurs want a government role in crowdfunding, with match

funding and financial support being the most popular option, followed by government

promotion of crowdfunding.

Finding 2B: Administration of small amounts of government money for crowdfunding is

not financially viable for the government.

Finding 2C: Government partnerships with local crowdfunding platforms is being

discussed at the moment to get around the problem found in 2B. Support for the idea is

high amongst the majority of interviewees.

Finding 3A: Mentorship and support has helped locally crowdfunded businesses succeed

in reaching their funding targets.

Finding 3B: PlaformName’s innovative model of mentorship and accelerator partnership

is responsible for it’s very high 78% success rate. South African platforms that do not

offer these services have significantly lower success rates than PlatformName.

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Finding 4A: Social networks can be leveraged to increase the chance of a crowdfunding

project meeting its funding goals, via vetting and direct non-financial support from the

crowd.

Finding 4B: Crowdfunding can be used as a way of linking together disconnected social

networks, and creating new communities that enable access to new people, relationships,

and sources of capital.

Finding 5A: Crowdfunding is locally suitable for a variety of businesses and projects, as

shown by the variety of successful projects on PlatformName.

Finding 5B: Marketing was the top reason for using crowdfunding locally, followed

closely by financial need and market validation.

Finding 5C: A majority of entrepreneurs interviewed stated that they would use

crowdfunding again.

Finding 5D: A majority of entrepreneurs thought that they would garner further

investment interest after a successful crowdfunding campaign.

Finding 5E: Traditional, cash based forms of crowdfunding already exist in Africa, and

have significant traction.

Documents

Crowdfunding's Potential in South Africa