Equity crowdfunding — where entrepreneurs source investment from any number of investors via an online platform — is slowly taking hold in South Africa.
Last year Nicholas Bush (pictured above) and his craft brewing company Drifter Brewery raised almost R3.9-million from 196 investors on SA equity crowdfunding platform Uprise.Africa (see this story).
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And last week SA mobility startup Lüla launched a campaign on the same platform to raise R2.5-million by late May, in return for giving up an 8.5% equity stake. So far the startup has raised R254 000 with over 80 days left of the campaign (see this story).
It’s not always worked out. Another campaign, to raise R3-million to fund the publication of more African literature flopped after the campaign failed to meet its fund-raising target (see this story).
Via email Uprise.Africa CEO Tabassum Qadir told Ventureburn what kind of startups and businesses should consider turning to the platform to source investment, what documentation one needs for the platform to conduct a due diligence on your organisation and how businesses can run a successful campaign (see this Q&A with Qadir on what investors should know about investing on the platform).
Are there certain kinds of projects that are best suited to equity crowdfunding platform?
No, Uprise.Africa is sector agnostic, meaning any business in any industry is suitable for the platform.
However, the general trend among equity crowdfunding campaigns across the world is that consumer-facing companies, tech companies and innovations perform well in their fundraising campaigns. These companies often generate a great deal of interest from investors because of their innovative business models.
What kind of things does Uprise.Africa look at when deciding whether to list an investment on the platform?
Uprise.Africa performs a thorough due diligence and analysis on the businesses to assess whether they are funding ready and are valued at what they say they are.
This assessment of the businesses determines the outcome of whether to list the investment or leave it off the platform.
Is there a minimum amount in investment and minimum stake that you should offer up to investors?
The minimum amount of investment which company’s should be seeking if they want to list is R2-million, and the equity stake which is offered is determined by the entrepreneurs. The entrepreneurs make the final decision on how much equity they are looking to sell in their businesses.
What happens if you don’t reach your target? Do you not get any of the investment?
Ideally, we want to give investors the opportunity to pursue other investments if a startup’s crowdfunding campaign was unsuccessful. This is why all the money is returned to the investors if the campaign did not reach its crowdfunding target.
The entrepreneurs cannot approach individual investors afterwards, because of the protection of personal information none of the investors data is exposed, so the businesses do not know who invested into their companies. The investors remain anonymous to the entrepreneurs.
What does it take to run a successful crowdfunding campaign? Why was the Storied campaign not successful, while Drifter Brewery raised almost R3.9m? (Qadir offered the following advice – Ed)
Take the time to truly learn about and connect with your audience. A crowdfunding campaign, although as the name suggests, is not solely about the funds. It’s also largely about market validation and getting to know your audience.
Great campaigns are characterised by startups that have a large following both in their private and public networks.
Prioritise marketing efforts. Marketing can make or break a crowdfunding campaign. Startups need to prioritise their marketing efforts by bringing their target-market along on the journey.
It’s not enough to just post sporadically about your startup or campaign, you need to constantly include your target market on the journey and this is done through marketing.
Don’t underestimate the power of visual appeal. According to studies, people tend to remember about 20% of what they read and 10% of what they hear but the same studies have shown that people tend to remember an impressive 80% of what they see and do.
With the rise of social media platforms, visual consumption of information has significantly increased which makes it even more important for startups to create content that is both educational and visually appealing for their audience.
Set milestones to reach the overall goal. Crowdfunding isn’t about casting a stone in the dark and hoping it hits something. There’s a science behind crowdfunding and one of the ways to make a campaign successful is building into it milestones that’ll enable the overall goal achievement.
At Uprise.Africa, we work with the startups to help them understand the factors surrounding crowdfunding and best practice to increase the prospects of getting investment.
Why only run the campaign for 90 days? Can you extend it?
The reason for capping the campaign duration to 90 days is so the investor’s cash is not locked in indefinitely.
We have various other investment opportunities in our pipeline, so we encourage investors to re-invest in a different startup should the initial one not raise the required funding.
If a campaign reaches its 90-day duration, we will not extend it. However, we are open to repeating the campaign as a separate application with updated information.
What do you need in terms of documentation from entrepreneurs?
The following is required to perform the due diligence process –
Financial due diligence:
- Review of financial model with projections (company evaluation)
- Historical financials
Legal due diligence (operational businesses):
- Company governance and structure
- Company’s registration documentation
- Company memorandum of incorporation
- Business plan
Contracts or agreements and obligations:
- All lease agreement(s)
- Business address, property evaluations
- Overview of any negotiations that are of material importance to the company.
- Any material trading agreements or obligations
- List of all major customers or suppliers (accounting for more than five percent of your turnover) and all agreements with them including the details of each agreement.
Directors and employees:
- All letters of appointments for your non-executive and executive directors
- A director registry listing all your directors and their contact details
- Copies of all the executive and non-executive directors’ IDs
- All employment contracts (including the managing director) and independent contractors
- A list of all your employees (who can remain anonymous) showing; their job titles, their job descriptions, the commencement date of their employment, their length of continuous employment, their current pay, their benefits, any bonus or any incentive arrangements you may have with them, their hours of work, indicated whether they are full time or part time employees, their notice periods, their holiday entitlements and their official place of work.
- Overview of any employee incentive scheme(s), commission, profit sharing arrangement(s) you may have between your employees
- Overview of employee loan agreements
- Overview of staff handbook(s) or policies
Shareholders:
- Copies of all share certificates
- Overview of your shareholder registry listing all your shareholders, their contact details and addresses.
- Copies of any shareholder and director resolutions passed in the last three years.
Financials:
- Business bank account details
- Financial statements for the last three years
- Director’s reports
- Financial forecasts giving us an indicator of your Company’s projected growth.
Tax, Insurance and Banking
- Copies of insurance policies & records, including any premium receipts and certificates of insurance.
- Copies of the company’s tax returns, value added tax returns, employees tax returns and dividend tax returns.
- Copies of any insurance claims made from existing or pre-existing insurance policy.
- Overview of any SA Revenue Service (Sars) disputes if relevant.
Legal:
- Documentation confirming the business name and its registered address or office.
- Overview of any licenses required to operate your business, and copies of the licenses.
- Copies of any standard terms and conditions used by your company.
- Copies of any existing trademarks, patents, designs or licenses of similar agreement (registered or otherwise). Copies of any documentation detailing said trademarks, patents, designs and or licenses.
- If applicable, an overview of any past, current or pending legal disputes.
- All domain names and copies of domain ownerships
Assets and Liabilities:
- A list of your assets and liabilities. Include valuations of each asset and the outstanding purchase price of said assets
- Overview of any software in use, database or computer hardware. Copies of lease licensed software.
- Copies of property owned by the company presently or in the past.
- If all the correct documentation is handed in, the overall due diligence process can take two weeks.
Are there any fees that those seeking investment need to pay, even if it’s just for the platform to conduct a due diligence?
Yes there are fees, these are:
- Admin Fee: Investment analysis carried out by internal analyst and the investment committee (R2000)
- Financial due diligence: Ensure alignment of financial forecast with business model and industry norms or benchmarks. Review historic financial and forecasts. Give report and opinion on business risks, uptake agreements and investment valuation (R5750
- Legal due diligence: Ensure the correct investment vehicle, review industry compliance, uptake agreements and any other legal contracts (eg leases) (R8050)
- Prospectus: Contribution as one of five companies included in the development of a prospectus (R8050)
Read more: In’s and out’s of investing on equity crowdfunding site Uprise.Africa [Q&A]
Featured image: Drifter Brewery founder Nicholas Bush (Supplied)
