Crowdfunding rescues distressed SMEs during lockdown
South Africa’s small and medium enterprises (SMEs) have turned to crowdfunding platforms to keep their businesses afloat, as they navigate the unprecedented disruption caused by the coronavirus (COVID-19) pandemic.
Since the introduction of SA’s strict lockdown regulations on 26 March, most South African businesses have halted operations, resulting in a blow to the country’s fragile economy, with scores of people either taking pay cuts or losing their jobs during the lockdown period.
Small businesses have taken the biggest punch, as the impact of COVID-19 rattles markets across the globe and negatively impacts their bottom line.
As SA prepares to enter level three lockdown from 1 June, millions of South Africans will return to work, while many businesses such as hairdressing salons, gyms and game reserves remain closed, and restaurants, liquor stores and others will partially operate.
Local crowdfunding platforms Thundafund, Uprise Africa, Jumpstarter Crowdfunding and BackaBuddy told ITWeb that registrations of local businesses have soared on their Web sites since the inception of the lockdown, as entrepreneurs set up crowdfunding campaigns to foot their bills and pay salaries.
Crowdfunding is the practice of funding a project or venture by raising small amounts of money from a large number of people, typically via the Internet.
Local businesses which have reportedly raised more than R100 000 each via crowdfunding platforms include the Jolly Roger pub, the Whippet coffee shop and The Service Station restaurant.
Cape Town-based innovation projects crowdfunding platform Thundafund, which recently launched its business arm, BackaBusiness, through SimplyBiz, says the dramatic rise in listed SME campaigns has seen some fortunate entrepreneurs meet their targets, as generous South Africans dig deep into their pockets to assist.
“Between March and April 2020, we have noted a 64% increase in the number of companies signing up on our platform and a 147% increase in the number of projects published,” says Winter Mutheu, campaigns and community manager at Thundafund.
“Overall, we've been surprised at the generosity of backers during this crisis. People love the businesses they frequent, and as such, have been willing to fund their campaigns to ensure their survival into the future. We are very encouraged that this effort to support local businesses has been strong amidst uncertainty.”
Some of the recently listed businesses on Thundafund include fitness and entertainment company The Silk Workshop, which has so far raised over R19 000,the Fresh Earth Food Store (R10 875), Pristine Spas (R16 451), Talent Unleashed (R14 100) andthe House of Mack Nail Bar (R2 520).
“We expect the number of businesses crowdfunding to continue to rise as the economy seeks ways to recover. We've also seen a huge rise in social campaigns such as PPE and food distribution drives,” notes Mutheu.
A recent survey conducted by Heavy Chef among SA’s small business owners found that three out of four SMEs believe they will not survive beyond July, due to the repercussions of the lockdown on their profit margins.
The concept of crowdfunding is growing rapidly across Africa, with BackaBuddy saying a report from the University of Cambridge estimated the total crowdfunding activity in Africa will reach over R30 billion by 2025.
In SA, donations-based crowdfunding is quickly gaining momentum.
Crowdfunding generally falls into four broad categories: donation-based, equity-based, rewards-based and debt-based.
Most crowdfunding platforms take a percentage of the donated proceeds.
Zane Groenewald, marketing and public relations officer for BackaBuddy, says after the implementation of the nation-wide lockdown, BackaBuddy has seen a 32% increase in the number of campaign submissions and a 72% increase in the number of individual donations on the platform.
Business campaigns that launched on BackaBuddy during the lockdown include: Cape Town Family Doctors, which seeks to raise support for in-home healthcare workers (raised R160 000),Beerhouse (R116 000), GrootFM (R153 000), Jurgen Garden Services (R26 000) and Bloemfontein Authentic Barbershop (R17 000).
“We have seen so many lives transformed through the power of giving since our establishment in 2007. However, the challenge in raising funds through crowdfunding remains the inability to tell a story that encourages donors to support a cause and having access to a network of supporters that will help you spread the word,” adds Groenewald.
Equity crowdfunding platform Uprise Africa experienced a 200% growth in applications from entrepreneurs interested in raising capital in return for equity, during the lockdown period.
Tabbassum Qadir, CEO of Uprise Africa, explains: “As the economic impact of COVID-19 continues to deepen, businesses are increasingly faced with unexpected challenges, and a sufficient funding runway has become even more important than when the economy was in ‘business as usual’ mode. We are currently evaluating a mining business, a well-known fast food chain and an aviation business looking to raise equity capital.”
Derek Whitehead, chief operations director of Jumpstarter Crowdfunding, says the lockdown has drawn an increase of 10% to 25% in businesses that have set up campaigns on the small business crowdfunding site.
“We are currently working with a well-known bakery, which is crowdfunding to keep afloat and help their 25 employees. We also have a live project to help raise funds for non-broad-based black economic empowerment businesses and a list of other live social and education projects aimed to help South Africans in need during the lockdown.”
Greater investor conservatism
Nedbank forecasts that 1.6 million jobs will be shed in SA in 2020, with National Treasury projecting that SA’s GDP rate will contract by between 5.4% and 16.1%.
Bronwyn Williams, trend translator and future finance specialist at Flux Trends, notes government has introduced various COVID-19 relief measures to provide SMEs with financial aid, with early indications from SME South Africa showing an estimated 68% of businesses that applied have been unsuccessful.
“Small businesses, restaurants in particular, have started crowdfunding campaigns to pay their bills, salaries, cover fixed costs and assist their staff who would otherwise not be earning anything,” states Williams.
“Placing the ethics of a for-profit private business asking the public to cover its corporate responsibilities aside here, the ingenuity of these campaigns must be commended.”
While there have been many success cases, Williams believes the problem with crowdfunding during COVID-19 is that there are simply too many that need help, with a limited number of people or organisations being in a position to assist.
“There is an ‘oversupply of opportunities’ to donate and to invest in, and there is an undersupply of donors and investors with money to spare for crowdfunding exercises. No matter how promising these initiatives are, COVID-19 is a total crisis affecting the whole economy at the same time.”
Qadir expresses concerns that while Uprise Africa has witnessed an increase in SME applications, the valuations on the deals have been much lower during the current crisis, as potential funders also take a financial knock.
“From an investor perspective, the sharp falls and volatility in equity markets have resulted in greater investor conservatism, with less appetite for riskier companies. Unfortunately, the market instability has also diminished disposable income and buying power,” she points out.