Climate Technology Program | In Brief No. 1 Crowdfunding for Green Businesses: Lessons from East African Startups Crowdfunding offers a new alternative to address the financing needs of capital- intensive clean technology businesses in developing countries. To better understand crowdfunding’s potential and limitations, the World Bank Group’s Climate Technology Program interviewed a number of East African entrepreneurs who were early adopters of this new fundraising mechanism. From their successes and failures, key lessons were drawn for entrepreneurs, investors, and regulators. Find the full report “Crowdfunding in Emerging Markets: Lessons from East African Startups” at www.infodev.org/CrowdfundingAfrica. Introduction Figure 2. Crowdfunding Breakdown by Crowdfunding is a technology-enabled approach to raising Sectors (2015) funding online from multiple individuals to finance a project or business venture. An entrepreneur launches a campaign East Africa on a crowdfunding platform to pitch his or her idea to a large number of potential supporters for donations or investments. Africa In North America and Europe, crowdfunding has emerged Global as a promising alternative for entrepreneurial finance. In particular, crowdfunding platforms are increasingly targeting 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% the development and commercialization of clean technologies in developing countries. For example, Kiva, a leading peer- Others Health Agriculture Education Services to-peer lending platform, launched the Kiva Green Loan in Housing Women & Girls Technology & Environment 2011 to provide small loans to both individuals who seek to Source: AlliedCrowds purchase clean energy products and retailers who distribute them. 1 Mosaic, a debt crowdfunding platform that funds solar projects in the United States, is planning to develop a new loan product to allow the American public to invest developing countries by enabling end customers to make in clean energy infrastructure projects in the developing payments via mobile phones to developers and investors. 2 world. Mosaic will adapt its lending model to the context of These innovative crowdfunding models may provide solutions to common financial challenges faced by clean technology 1. http://www.kiva.org/press/releases/release_20130114-13 ventures in developing countries, such as high upfront capital requirements and consumer acceptance. Figure 1. African Crowdfunding Market Today the Africa crowdfunding market is active and growing, Breakdown by Funding Type in 2015 though concentrated in peer-to-peer lending (see Figure 1 and Figure 2 ). According to a report by Allied Crowds, the 55% 4% total crowdfunding market in the developing world, excluding Lending-based Reward-based funding: China, is projected to be about $660 million for 2016 – of funding: Funders receive a Funders receive which Africa should account for about 27 percent. 3 debt instrument a token gift of appreciation or As the concentration in lending-based crowdfunding suggests, that pays a fixed rate of interest pre-purchase early-stage entrepreneurs in Africa are not yet leveraging the and returns of a service of full range of options for this new financing tool. To understand principal on product. how clean technology firms in developing countries can more a specified effectively utilize crowdfunding, the World Bank Group’s schedule. 38% Climate Technology Program interviewed a number of East 3% African (EAF) entrepreneurs who were early adopters of this Donation-based new fundraising mechanism. Their experiences led to the Equity-based funding: funding: following key lessons. Funders receive equity instruments Funders donate without or profit sharing arrangement. expecting monetary 2. https://joinmosaic.com/blog/press-release-mosaic-awarded-1-million-pow- compensation. erful-answers-award-verizon/ Source: AlliedCrowds 3. https://cdn.filestackcontent.com/kNfFQ9IgT2ObxzjhGqUU In Brief No. 1|Page 2 Lesson 1. Time Commitment of Crowdfunding Campaign Although crowdfunding has generated a great deal of buzz It is critical for entrepreneurs to budget time and resources as a source of entrepreneurial finance, it requires a significant so that their businesses do not suffer. Small ventures might commitment of time and resources. In new crowdfunding hire temporary staff to launch and implement a crowdfunding markets like EAF, entrepreneurs tend to underestimate the campaign. Entrepreneurs should also compare the total time they effort needed to crowdfund effectively. A typical campaign will spend on crowdfunding to the time needed to raise other can take months and considerable funding to prepare, types of capital. This will help them evaluate the opportunity execute, and follow up. One common challenge shared by costs of crowdfunding and determine the best way to raise capital the interviewed EAF entrepreneurs was that crowdfunding and resources. For example, crowdfunding may not always be the distracted them from ongoing business operations. See most favorable option in countries such as Ethiopia, where grant Figure 3 for a short case study. financing is available from multiple sources. Figure 3. Nikweli’s Campaign on Kickstarter Nikweli is a human resources matching engine for service industry businesses founded by Tiffany Tong in Tanzania.* The Challenge Platform Choice and Funding Benchmark Raise CAD$5,000 on Kickstarter • Kickstarter is a donation-based platform, and to: Nikweli represented categories that were • register her company especially attractive to contributors, such as • refine her website women, entrepreneurship, and Africa. • • perform outreach Nikweli raised CAD$6,366 (about • advertise $5,000) from 40 backers, which surpassed her goal. Tong’s Reflection Why Crowdfunding? • “There was a lot to follow up on. • Tong chose donation-based We had to send out personalized crowdfunding over grant because emails to friends and family,” grant application processes were too Tiffany said. The outreach, while time protracted, and she needed money consuming, “was fun, but was also time relatively quickly. we could have spent doing things for the company.” • Although the company currently has two private investors, the company was too early stage at the time for venture capital or a bank loan. * Some companies from outside the clean technology sector were included in the research to capture a broad range of crowdfunding lessons for EAF entrepreneurs. In Brief No. 1|Page 3 Lesson 2. Platform Choice Once an entrepreneur has decided to pursue crowdfunding, the offers various non-monetary benefits, such as gauging next step is to choose a platform that can meet the company’s demand through product presales. Entrepreneurs should think business needs. There is a wide range of platforms that holistically about their business needs and choose a platform offer entrepreneurs access to diverse financial products and that can provide maximum benefits. Figure 4 offers a number of contributors. Choosing the correct platform is crucial to achieving questions and examples that can help entrepreneurs determine success, and entrepreneurs should base their platform choice on: the appropriate platform for their crowdfunding campaigns. • Business needs, both monetary and non-monetary • Awareness of the existence of a platform that could meet Besides business needs, when choosing a platform and setting a fundraising target, entrepreneurs should also consider statistics, business needs • Sufficient information to explain the platform’s offerings and such as the success rate for a particular instrument or the average amount raised in a specific region. The story of Wanda how to work with the platform Organic (Figure 5) illustrates how data scarcity can mislead an Crowdfunding is mainly a fundraising mechanism, but it also entrepreneur into choosing an ill-suited platform. Figure 4. Monetary and Non-Monetary Needs Case 1 Case 3 A business in need of capital and well- A young company with a prototype connected mentors uses an equity conducts market tests through a presale platform to engage angel investors and Monetary Non- crowdfunding platform to gauge other prominent members needs: monetary popularity and solicit feedback of the business community. needs: from early buyers. 1. What is the specific 1. Does the business funding need? offer a new product and need to gauge market 2. What type of financial demand in advance? Case 2 instrument is most Case 4 A business that needs a appropriate? 2. Is the business A business that intends to significant amount of capital to trying to enter a new launch an existing product into build infrastructure leverages its 3. Which platforms market? Does it a new market uses a crowdfunding cash flow to access debt through a offer the desired platform with a recognizable and need a publicity peer-to-peer lending platform. credible brand for a publicity campaign instruments in campaign? your region? in that new market. In Brief No. 1|Page 4 Figure 5. The Crowdfunding Experience of Wanda Organic Wanda Organic is a bio-organic soil company led by Marion Moon and incubated at the Kenya Climate Innovation Center. Wanda fertilizers enable farmers to produce more and better food, thus increasing family incomes, creating new employment, and developing rural economies, while restoring and strengthening the health of Africa’s soil. The Challenge Platform Choice and Funding Benchmark Raise $45,000 on Indiegogo to: • Indiegogo is a donation-based platform, and campaigns • Construct two distribution centers related to women’s entrepreneurship and agriculture • Build training and typically performed strongly. demonstration sites • The $45,000 goal initially seemed • Cover administrative costs realistic given the $58,000 global average for renewable energy projects on Indiegogo. Moon’s Reflection The Problems • The Indiegogo campaign • Wrong instrument: Interested garnered great exposure and backers preferred debt to donation. invigorated their online presence, but it didn’t result in the financing • No access: Moon could not access a platform that would allow her to issue debt to they wanted. her network in Kenya. • “If I had to do it all over again, I wouldn’t choose a • Wrong benchmark: Moon targeted Kenyan contributors, donation-based platform.” but the benchmark came from data in developed countries. Lesson 3. Barriers to Payment Entrepreneurs in developing countries face a unique challenge country. However, if entrepreneurs run their campaigns on when attempting to transact across borders. Platforms often local platforms, such as M-Changa, they are choosing local restrict who is eligible to launch campaigns on their platforms, over international crowds as these platforms do not have and local legal and regulatory regimes impede transfer of enough credibility or popularity to appeal to international funds across borders. For example, to launch a campaign on contributors. Therefore, platform restrictions should be Kickstarter, entrepreneurs must have an identification card considered by emerging market entrepreneurs when (ID) and bank account from one of the 18 OECD countries. assessing how effectively a platform will be able to raise Payment systems utilized by the most popular platforms assess money from their online networks. See Figure 6 for payment fees and limit monthly withdrawal which stymie the amount guidelines for some of the major platforms in Africa. East African entrepreneurs can raise from outside their home In Brief No. 1|Page 5 Figure 6. Payment Systems Platforms Entrepreneurs Backers Charges a 5% fee and a 3% payment processing Must have an ID and a bank account in Must pay with a major credit card. fee, plus $0.20 per one of 18 OECD countries. International pledge. Charges a 5% fee and a payment processing Must pay with a major credit card, No restrictions on geographic location. fee depending on the Apple Pay, or PayPal. payment method. A Kenyan platform that African marries mobile payment Can pay with PayPal, credit cards, No restrictions on geographic location. with crowdfunding. M-Pesa or Kenyan mobile networks Charges a service fee of such as Safaricom and Airtel. 4.25% Lesson 4. Maximizing British-Indian entrepreneur whose network is based in the United Kingdom and the United States, an advantage most EAF entrepreneurs Funding Potential do not have. Entrepreneurs who cannot confidently access international crowdfunding markets should think realistically about the fundraising While crowdfunding presents an opportunity to overcome traditional potential of their available networks. barriers to capital, it is simply a technology-enabled approach to performing an old and difficult task: raising money from a network. Second, entrepreneurs should seek assistance from multiple sources, The experiences from EAF highlight two takeaways that could help including matching funds, business incubators, and online networks, entrepreneurs in developing countries maximize the amount of funding as described below, to increase their fundraising prospects. received. Matching Funds First, entrepreneurs should spend a significant amount of time building a Around the world, a number of crowdfunding matching schemes contact base they can reasonably expect will contribute to the campaign. have been implemented to incentivize the giving or lending of The quality and quantity of networks dictate the funding potential of a money to campaigns with a positive social or environmental crowdfunding campaign. impact. See Figure 7 for an example of a matching partnership between Fishmate and the Cheetah Fund . The experience of Shake Your Power illustrates the importance of base building. Shake Your Power is a project in Kenya run by British-Indian Business Incubators and Accelerators musician Sudha Kheterpal. She produced a musical instrument called Business incubators, such as the World Bank Group-supported a Spark that can be used to generate off-grid power. Shaking the Spark Kenya Climate Innovation Center,4 can help entrepreneurs for 12 minutes produces one hour of light. Kheterpal successfully raised effectively leverage crowdfunding. Business incubators and £53,001 (about $81,000) through a campaign with a target of £50,000 accelerators can provide locally relevant data, assist with on Kickstarter. Kheterpal spent a huge amount of time promoting the campaign to her network and almost 60% of the £53,001 came from people within her extended social network. However, Kheterpal is a 4. www.kenyacic.org In Brief No. 1|Page 6 platform choice, and provide critical support to marketing For example, one climate smart agriculture entrepreneur strategies and campaign management. Affiliation with a well- interviewed did not reach his fundraising target, but he secured regarded incubation organization can also build the confidence a contract of $120,000 with a partner as a direct result of the of potential campaign contributors. crowdfunding campaign. Another clean fuel entrepreneur who did not meet her target secured a partnership with Cisco. Online Resources Crowdfunding platforms offer great training tools for entrepreneurs. Conclusion To help entrepreneurs familiarize themselves with crowdfunding While the crowdfunding market in Africa is nascent, there are many activities, many platforms have instructional manuals, data sets, and reasons to be optimistic about its future. As the market matures testimonials. Additionally, experienced crowdfunders can serve as and grows, a number of interesting evolutions can be expedited peer mentors by sharing their contacts, knowledge, and successful by the collaborative efforts of the public and private sectors, such campaigns with aspiring entrepreneurs. as data collection, the matching fund model, and payment system innovation. Lesson 5. Non-Monetary Benefits In the clean technology sector, crowdfunding platforms face both opportunities and risks in their experiments to expand in Beyond monetary gains, crowdfunding has been shown to increase developing countries. Ill-suited regulations in equity and debt the outward visibility and transparency of a company, which in turn crowdfunding, limited investor protection, and the lack of effective increases its perceived trustworthiness with customers, investors, due diligence are among the barriers to expanding crowdfunding and partners. Crowdfunding campaigns can be used to engage with investment. Nevertheless, given the environmental and social the potential customers early on in a product life cycle as a way to goals of the businesses and the growing market opportunities, gather market information and refine the product, raise awareness, crowdfunding investment could play a catalytic role in financing engage potential evangelists, and build new strategic partnerships. clean technology ventures across the developing world. Figure 7. Matching Funds 1% Club is a Dutch crowdfunding platform that aims to create positive change around the world. The treasurer of Fishmate made a single online contribution of €2,678 to 1% Club. Contact Base Matai formed a The Cheetah Fund is a €400,000 fund that partners with 1% harambee* and raised Club to support African pioneers’ world changing projects. Fishmate was established by €2,678 from 20 family If pioneers manage to crowdfund at least 30% of their target Mukeli Matai of members. A “treasurer” amount via the 1% Club within 30 days, the Cheetah Fund Nairobi, Kenya, to collected these funds will grant them the remaining amount. Fishmate’s €2,678 address fishing via m-Pesa or in was matched with €6,000 from the Cheetah Fund. sustainability. cash. *Harambee is a Kenyan tradition of community self-help events, e.g. fundraising or Seeing the success of the first campaign, Dutch development activities. university students ran a second crowdfunding campaign for Fishmate and raised an additional €7,912. In Brief No. 1|Page 7 Climate Technology Program In Brief About Us The Climate Technology Program (CTP) In Brief series is a publication of the World Bank Group’s Trade and Competitiveness (T&C) Global Practice and infoDev. infoDev’s CTP is managed by the Innovation and Entrepreneurship Unit of T&C. CTP focuses on the growing opportunities of the clean technology sector in developing countries. Through a global network of seven Climate Innovation Centers, the program provides local entrepreneurs with the knowledge and resources they need to launch and scale their innovative business solutions to climate change. CTP In Brief is a series of knowledge briefs highlighting important aspects of the CTP global and in-country operations and research. Learn more at www.infoDev.org/climate. © 2016 The World Bank Group Acknowledgements 1818 H Street NW This In Brief is based on the infoDev publication “ Crowdfunding in Washington, DC 20433 Emerging Markets: Lessons from East African Startups. ” Please visit Website: www.infodev.org www.infoDev.org/CrowdfundingAfrica to read the full report. This brief was prepared by Xue Zheng with contributions from Samuel Email: info@infodev.org Raymond, Michael Ehst, Jin Lee, Lauren Caldwell, and Nicola Vesco. Twitter: @infoDev Facebook: /infoDevWBG