East Africa’s Entrepreneurs Turning to Crowdfunding for Growth Capital

The World Bank estimates that 60 million jobs need to be created annually to keep employment rates steady and to keep up with population growth. In the developing world, 4 out of 5 new jobs are created by SMEs; these firms, however, are often cash-strapped and are unable to access the financing they need to start up and grow their operations. Unable to prove their creditworthiness to banks, entrepreneurs in developing countries are increasingly looking at new, alternative forms of finance to raise capital. In the following article, Anton Root of AlliedCrowds examines how entrepreneurs in East Africa are turning to the newcomers, focusing specifically on crowdfunding.

Growing up in the west Kenyan town of Awendo, Tom Osborn experienced a problem familiar to many Africans: respiratory health issues caused by his indoor charcoal stove. Instead of carrying on, the entrepreneurial then-teenager teamed up with two friends and created 30 kilograms of an alternative biomass fuel source which burns longer and hotter than firewood and produces almost no smoke. In addition to reducing cooking fuel consumption and improving the health of his family, his briquettes — made out of sugarcane waste — help to protect the local environments by reducing the need to cut down trees for firewood.

Rocío Lara/Creative Commons License

Rocío Lara/Creative Commons License

Osborn has sold over 160 tons of the stuff since launching in February 2015. His company, GreenChar, produces the briquettes at a factory that employs 7 workers; the raw materials for the fuel are gathered by a team of 30. The company has recently launched a product aimed at businesses.

GreenChar has grown tremendously since launch, winning multiple grants and awards for its innovative solution to a serious problem; Forbes named Osborn as one of its 30 Under 30 Social Entrepreneurs in 2015. Despite this success, however, the company is still having trouble securing growth capital.

 

The crowd unlocking access to capital

This is another problem familiar to Africans — and entrepreneurs in most countries across the developing world. Osborn, an innovator at heart, has not shied away from trying out new ways to secure capital. Earlier this summer, he created a crowdfunding campaign on the Kenyan platform M-Changa. The campaign was a hit, raising over KES 3 million (around $31,000), of which Energy4Impact (formerly GVEP International) matched $30,000.

GreenChar’s is the second-most successful campaign on M-Changa to date, and this hit may inspire more Kenyan entrepreneurs to experiment with crowdfunding as a way to raise growth capital. Indeed, it’s not the only successful crowdfunding campaign for a Kenyan startup this summer — the footwear company Enda raised over $125,000 on Kickstarter, receiving international media coverage in the process.

While tapping into Kickstarter’s largely American audience worked for Enda, homegrown platforms have a key advantage over their international competitors in the developing world: they’re highly localized. M-Changa, for example, makes use of Kenya’s sophisticated mobile money ecosystem. According to Energy4Impact, over 120 contributions to GreenChar’s campaign came via mobile phones.

M-Changa is not the only mobile crowdfunding company in East Africa. Fellow Kenyan platform PesaZetu — currently in beta — allows people to borrow and lend to one another, aiming to reduce interest rates for small borrowers, while providing a solid return to the lenders. Its secret sauce is an innovative mobile credit scoring model that allows the company to assign appropriate interest rates to each borrower. And neighboring Uganda is home to Akabbo, another mobile-friendly crowdfunding platform.

Global demand

It’s easy to imagine, in the not-too-distant future, East African crowdfunding platforms facilitating the flow of capital among individuals, enabling businesses to grow, and laymen to lend to each other, bypassing middlemen.

Until then, international crowdfunding platforms are filling the gap. Among the most exciting breed of platforms are P2P lending sites that allow donors from around the world to finance loans for solar projects. One of the emerging leaders in this space is Trine, a Swedish platform that has raised hundreds of thousands of dollars for projects across Africa since launching at the end of last year.

The global demand for such opportunities is not difficult to explain. Investors are increasingly focused on the triple bottom line: the desire to do social and environmental good while making a return. And in a world of low yields, projects that expect to return up to 6.75% on an annual basis are not a bad investment, even for those who don’t value the social and environmental impacts.

Viewport/Creative Commons License

Viewport/Creative Commons License

Innovative finance filling the gaps

For East African SMEs, innovative solutions to a lack of available business financing are quickly becoming the norm. In addition to crowdfunding platforms, invoice trading firms like Umati Capital are making it easy for agribusinesses to finance operations; and mobile-enabled micro insurance schemes are allowing farmers to invest more in their businesses. Impact investors, VCs, and angel investor groups are an ever more present part of the picture. (To help entrepreneurs make sense of the potential sources of funding available, AlliedCrowds recently launched the Capital Finder, a tool to connect developing world entrepreneurs with capital providers.)

GreenChar’s experience shows that African entrepreneurs are tackling the continent’s biggest challenges. A lack of financing shouldn’t hold them back.


The views expressed in this article are those of the author and do not necessarily represent the views of Development in Action.

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