Crowdfunding Potential for Nigeria 2017 - CrowdfundingHub

CROWDFUNDING POTENTIAL FOR NIGERIA Report 2017

Suzanne Wisse –Huiskes

CROWDFUNDING POTENTIAL FOR NIGERIA 2017

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CrowdfundingHub is the European Expertise Centre For Alternative and Community Finance [email protected] www.crowdfundinghub.eu @CrowdfundingHub Keizersgracht 264 1016 EV Amsterdam The Netherlands

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Suzanne Wisse-Huiskes


Table of contents Introduction Acknowledgements I. II.

III. IV.

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What is Crowdfunding? State of Crowdfunding in Nigeria A. Technology B. Culture of Entrepreneurship C. Regulation D. Capital Crowdfunding Potential for Nigeria in 2017 About

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Introduction This report is published by the CrowdfundingHub to review and assess the development of the crowdfunding sector in Nigeria. Until now this publication has been the only West Africa focused assessment of crowdfunding.

investments from a large group of people (the crowd). This new form of capital formation emerged in the wake of the 2008 financial crisis largely because of the difficulties faced by artisans and entrepreneurs in raising funds. With traditional banks less willing to lend, entrepreneurs started to look elsewhere for capital.

The report is researched and written by MatchBox Consultancy and follows a method using a mixed methodology of literature review, an extensive range of interviews, data collection and analysis and survey based content. Worldwide, crowdfunding is said to have raised 34,4 Billion USD in 2015. A fraction of this has been funded in Africa, 83,2 Million USD. This report provides an insight into how Nigeria has reacted to this trend and how the market is developing.

Crowdfunding began as an online extension of traditional financing by friends and family: communities pool money to fund fu nd members m embers with business bu siness ideas. This exciting phenomenon is spreading across the world. A 300% growth was established in the last years, predominantly in the US and Europe. In Nigeria, a handful of crowdfunding platforms are online. This is extremely limited for Africa’s first economy. The crowdfunding ecosystem is generally built on availability of Internet, social media and the ability to transfer funds in a standard based way, with mobile payments and online funds transfers. Regulation and trust are also a big factor.

Crowdfunding can be a powerful tool for social change in developing countries. It enables entrepreneurs to find capital. It enables political movements to engage a large crowd. It enables artists to market and sell their work. And crowdfunding enables non-profits to gain support from people with small donations. Crowdfunding is a form of alternative finance. It provides access to capital for a segment of the population that cannot access it through traditional means. In Nigeria, Africa’s largest economy and home of millions of young entrepreneurs, crowdfunding could be a great tool to boost organisations and individuals. However, crowdfunding is yet to be fully embraced.

The goal of this report is to determine the crowdfunding potential for Nigeria and to add to the discussion on crowdfunding in Nigeria and West Africa. It is intended to be a practical document for those interested: crowdfunding platforms, investors, entrepreneurs seeking funding, regulators and other potential stakeholders. The aim is to advance the field of crowdfunding as a part of Alternative Finance, as an alternative to traditional funding from banks and governments. Nigeria is a huge market with an incredible amount of potential if one gets the formula right.

What is crowdfunding? In short, crowdfunding is an Internet- enabled way for organizations to raise money (funding) in the form of either donations or

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Key Points Nigeria ____________ 01

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Nigeria is one of the fastest emerging markets in the world and Africa’s nr 1 economy. The country is at the beginning of an exciting growth of tech start-ups.

Crowdfunding platforms are slowly entering the market. At the start of 2017, 4 Nigerian based platforms were online. This is relatively limited.

The African continent accounts for about 83,2 Million USD crowdfunding in 2015. In Nigeria, an est. 7-8 Million USD was funded by crowdfunding.

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The banking system is moving ahead of its counterparts in other emerging markets. It provides a promising infrastructure for crowdfunding in Nigeria, with innovative mobile banking apps.

Nigeria suffers from great political instability. For entrepreneurs, it ‘s difficult to anticipate whether existing policies or regulation will change. In addition, corruption and multiple taxes make it a challenging environment.

In August 2016, the Securities and Exchange Commission of Nigeria (SEC) announced that equity crowdfunding is now banned in Nigeria until further notice. Donation based crowdfunding is still legal.

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Other major concerns according to this report are lack of trust and access to credit facility. These challenges will not be easy to tackle, yet many ambitious entrepreneurs are utilizing innovative strategies to overcome these obstacles.

Moving forward, donation and reward based crowdfunding should be fostered as a first step towards crowdfund investing. They have successfully paved the way for equity based crowdfunding in other regions.

Other initial steps include: Platforms bundle forces and work on new legislation with the current government. A regulatory framework is also essential to promote capital formation while protecting investors. External linkages in US and EU can be used for additional capacity.

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Acknowledgements ‘Crowdfunding potential for Nigeria’ is based on mixed-methodology including interviews, fact-finding and a survey that collected cultural perception from individuals regarding key factors in the applicability of crowdfunding within the country. The survey is based on the report ‘Crowdfunding Potential from Developing Countries’ from World Bank/Infodev 2013. This paper provides a self-assessment to

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gauge cultural perception from individuals regarding key factors identified as important in the applicability of crowdfunding within a culture or country. Over 30 market participants and actors including policy makers, NGOs, investors, and entrepreneurs completed the selfassessment to gain a wider range of opinions.

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I. What is crowdfunding? Crowdfunding is an Internet enabled way for businesses and other organizations to raise money in the form of either donations or investments from multiple individuals. Crowdfunding makes use of the easy accessibility of vast networks of friends, family and other supporters through social media websites like Facebook and Twitter. This new form of capital formation emerged in an organized way in the wake of the 2008 financial crisis largely because of the difficulties faced by artisans, entrepreneurs and early-stage enterprises in raising funds. With traditional banks less willing to lend, entrepreneurs started to look elsewhere for capital.

1. Equity Equity crowdfunding is focused on providing equity financing to companies. In this model the company will attempt to raise capital from a large group of small investors (the crowd) instead of a small number of large investors. In exchange for the investment, the crowd will get a portion of the shares of the company. 2. Lending In this model the organization or company will borrow money from the crowd. The details of the loan such as payback period, return, instrument (e.g. bond), etc. is defined by the fundraiser and the platform. Microfinance is a part of this model

Crowdfunding began in the US as an online extension of traditional financing by friends and family: communities pool money to fund members with business ideas. In less than a decade, crowdfunding has gained traction in a number of developed economies, including Australia, the United Kingdom, the Netherlands, Italy, and the United States.

3.Donations/reward The project collects donations from the crowd, while the crowd does not receive any financial benefit in return. The donations can be for non-business purposes including philanthropic, cultural or community-based projects. The reward model for donors will usually be in the form of non-financial rewards.

Crowdfunding has numerous benefits. Ultimately, there are millions of people giving their money over the internet to people they have never met. They trust that they get their just returns. This enables entrepreneurs, musicians, charity workers and others to tackle traditional boundaries to financing in their country to bring products and services to market in a collaborative way. And that is what is key for a developing market such as Nigeria.

Crowdfunding takes advantage of crowdbased decision-making and innovation, and applies it to the funding of projects or businesses. Using social networks, social profiles, and the viral nature of web-based communication, individuals and companies have raised billions of dollars in debt, equity, and donations for projects over the past five years. It has emerged into a multi-billion dollar industry. Types of crowdfunding A distinction can be made between the following three main crowdfunding models

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II. State of crowdfunding in Nigeria The African continent brings a minimal contribution to global crowdfunding activity, 0,5% of the global market in 2015. Slow adaption to crowdfunding by African entrepreneurs is believed to be caused by the regulatory environment and the fact that e-commerce is not broadly used. In Nigeria, Africa’s largest economy and home of millions of young entrepreneurs, crowdfunding could be a great tool to kick-start organisations and individuals. However, crowdfunding is yet to be fully embraced.

The total African Alternative Finance market accounts for about 83,3 Million USDi in 2015. Nigeria raised almost $8 million in 2015 with the majority of this coming from peer-to-peer business lending and equity crowdfunding (over 90% of activity). The remaining 10% can be attributed to microfinance, donation and reward-based crowdfunding. ii Main issues to develop a successful crowdfunding ecosystem are lack of trust and the absence of a regulatory framework. Obstacles will not be easy to overcome, yet initiatives e.g. CrowdfundingHub and the African Crowdfunding Association (AfcA) can contribute to amend the crowdfunding model to local needs.

Nigeria is one of the fastest emerging markets in the world. The country is at the beginning of an exciting growth of tech start-ups. An increasing part of the Nigerians are using social media and online stores. Also, the availability of capital is expanding.

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Crowdfunding is bound to grow in the coming years. Slowly platforms are entering the market for this reason. At the start of 2017, 4 Nigerian based platforms were online. This is extremely limited for Africa’s nr. 1 economy.

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Donate-ng.com is donation based (2015) targeting charities. Malaik is is an equity based platform (2015). Imeela is donation based (2016) targeting Nigerian designers, musicians and entrepreneurs. Naturad is donation based (2016) targeting charities. A handful of other platforms have come and gone over the past years but were unsuccessful. Others are still under

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Figure 2. Nigeria facts i

The Africa and Middle East Alternative Finance benchmarking Report; University of Cambridge, February 2017 ii The Africa and Middle East Alternative Finance benchmarking Report; University of Cambridge, February 2017

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development (1kfund.com, Pitch Africa, The Next Economy)iii. The major challenges to the performance of enterprises in Nigeria are: Lack of managerial skills, limited access to finance and policy environment issues.

The crowdfunding ecosystem generally consists of Technology, Culture of Entrepreneurship, Regulations and iv Capital. These key factors are represented in the next chapters of this report, as well as in the Survey completed by over 30 crowdfunding stakeholders in Nigeria. The Survey is an assessment for the countries readiness for crowdfunding.

For Nigeria to have a credible crowdfunding system, the country requires entrepreneurs and willing investors. Moreover, the country needs supportive ecosystems, enabling initiatives and actions, including sound regulations, effective technological solutions and cultures that can adapt to this new investment vehicle.

A. Technology

B. Culture of Entrepreneurship

Internet access, technology to facilitate the ongoing communication and new services to facilitate transactions

Co-working spaces, incubators and accelerators, peer-to-peer mentorship, oversight, investor relations/reporting

C. Regulations

D. Capital

Enabling policy from incorporation to bankruptcy, a regulatory framework for crowdfund investing

Financing for start-ups, activity of angel investors, existence of venture capital funds

))) A detailed list of current crowdfunding platforms can be found in chapter III

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Infodev/Worldbank report 2013



A. Technology The first key factors that facilitate crowdfunding in a developing country are technology and education. Strong social media market penetration and Internet usage are necessary to control demographic and technology trends to drive collaboration and cultural shifts. The most important difference between ‘traditional friends and family finance’ and crowdfunding is the usage of social media to broaden the reach of the fundraising campaigns and to use better measurement tools.

Nigeria boasts over 97 million mobile Internet users that have activities online. Yet, as big as the Nigerian tech landscape is, getting customers to pay online is still a major obstacle for ecommerce. The country’s two largest online shopping companies, Jumia and Konga, might have failed if not introducing its cash on delivery payment option, which is the preferred payment for the majority of the online transactions on these stores. Many Nigerians see online payments as something that could easily be manipulated and succumb to fraud. This lack of trust is further supported by the non-existence of any legal framework that protects investors against fraud reports.

In Nigeria, a little over half of the population uses the Internet v , however few people use a laptop to access the Internet. They use their smart phone instead, as it is cheaper and more effective; Wi-Fi is scarce whereas 3G is widely available in Abuja and Lagos, the commercial capital. The level of mobile smartphone penetration is not a particular high percentage (30%), however has a high growth in 2015. This growth is due to the young population (a shocking 60% is younger than 25 years old vi ). A smartphone is mostly used for social networking. Social media adoption in Nigeria is increasing exponentially over the past decade. The young generation is getting engaged in Social Media, especially Facebook and Twitter.

Summary The outcome of the survey on Technology states that mobile technology is seen as a mechanism for communication and collaboration by most Nigerians. The country is ready to use these tools to build communities of engaged entrepreneurs and investors, so that as the industry starts to develop, they can be connected. Crowdfunding platforms can use the power of social media to promote their campaigns.

The Nigerian banking system is moving ahead of its counterparts in other emerging markets. It provides a promising infrastructure for crowdfunding, with innovative mobile banking apps. It services electronic funds transfers and other Internet transaction enabled services.

v Source; CIA world fact book 2015 vi Source; CIA world fact book 2015

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B. Culture of Entrepreneurship Culture of entrepreneurship is another important factor in the crowdfunding ecosystem. Entrepreneurship is a big part of the Nigerian culture, the majority of the countries economy is made up of small business owners. Many Nigerians own one or more businesses, although most of them are not registered. Nevertheless, over 70.000 new businesses are registered on a yearly basis vii. It must be said, the lack of jobs and a rise in poverty leave few other options for the Nigerian people. And if one business fails, one can easily move on to the next without losing face.

including Co-Creation Hub, accelerators such as IDEA Hub, and numerous coworking spaces such as CapitalSquare and Lagos Garage. Lagos is hosting a network of angel investors, the Lagos Angel Network, which was formed by investors and influential businessmen. In addition, there are TedX platforms in Lagos and in Abuja. Summary Based on the assessment score of the Survey, Nigeria has a moderately developed entrepreneurial capacity and some investment risk tolerance. Opportunities are found in training and mentorship programs. Also, even more broad initiatives could be launched that engage early success stories in actively building the ecosystem. Creating external linkages for additional capacity can be helpful, for instance with the African Crowdfunding Association or other peers in the EU and US.

Governments and banks are not particularly eager to help entrepreneurs with loans or programs, so entrepreneurs mainly depend on Alternative Finance. Attracting Venture Capital from abroad to finance entrepreneurs is greatly difficult because of the country’s political and economical instability. People tend to take risks in their investments, although often they invest in a business because they feel obliged to help a friend or relative with their business. Nigeria has a growing number of diaspora investors that are based in the US, UK and EU. Collaboration between entrepreneurial events and hubs including business plan competitions, incubators accelerators, universities and co-working spaces can create a stage for opportunity and oversight in crowdfunding. Individuals have initiated incubators, entrepreneurial hubs and business plan competitions. Mostly without government help. Lagos, the commercial capital with a population of over 20 million, is home to internationally recognized incubators vii

The World Bank econ.worldbank.org/research/entrepreneurship

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C. Regulation Regulation can both enable and deter entrepreneurship and crowdfunding depending on its structure and scope. In general, Nigeria scores as one of the lowest countries in the world when it comes to ease of doing business. In fact, the country ranks nr. 169 on the world index, nr. 1 having the most business friendly regulations viii . Nigeria suffers from a great political instability. It is often difficult to anticipate for entrepreneurs when existing policies or regulation will change. In addition, corruption and multiple taxes make it a difficult environment to work in.

regulatory framework that will support this massive global innovation. Equity crowdfunding could prove to be an expedient way for many struggling entrepreneurs to raise capital, since they are considered as high risk to banks. Donation and reward-based crowdfunding are excluded from the SEC’s regulatory remit. The lack of patent laws is another concern. It discourages entrepreneurs to share their business ideas online. When their business model is showcased on a crowdfunding platform, their idea is unprotected from copycats. Another obstacle for entrepreneurs is the process of starting a new business in Nigeria. This process is frustrated by government bureaucracy, with people resorting to third party agents to help them facilitate the process of business registration. A positive note is that lower taxes and higher price ceilings have helped entrepreneurs to move forward. Also, the government is actively promoting use of Internet and trying to incorporate technology in the country.

In August 2016, the Securities and Exchange Commission of Nigeria (SEC) announced that equity crowdfunding is now banned in Nigeria until further notice. Donation based crowdfunding is still legal ix. SEC regulates all securities offered for sale by public companies in Nigeria and currently there are no provisions relating to crowdfunding in the SEC rules. Furthermore, they regulate the formation and operation of all types of companies and enterprises in Nigeria and can place restriction in dealing with transfer of shares. The SEC believes that crowdfunding cannot be effective in Nigeria for now because of lack of rules. The legal provisions of crowdfunding are a big challenge to the organisation. However, they are looking for ways to go about it so that companies will enjoy the benefits of crowdfunding in the country as well. In order to do so, SEC is looking at the crowdfunding rules in US and Canada in order to ensure an enabling legal and

Summary The outcome of the survey on the category Regulation implies that there is a fair amount of regulation in place to encourage entrepreneurship. The survey, however, does not take into consideration the recent ban on equity crowdfunding.

To build a credible crowdfunding system, system, the government should encourage the use of donation and reward based crowdfunding. More importantly, a regulatory framework is essential to promote capital formation while protecting investors.

viii

The world Bank, Data 2014 econ.worldbank.org/research/entrepreneurship ix http://www.thisdaylive.com/index.php/2016/08/1 5/sec-rules-out-crowdfu 5/sec-rul es-out-crowdfunding-in-niger nding-in-nigeria-for-now/ ia-for-now/ 15th August 2016

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D. Capital The availability of capital is usually one of the most prominent missing elements when attempting to build a successful entrepreneurial ecosystem. In developing

companies and networks that specialize in African entrepreneurs such as VC4Africa.

countries, limited access to finance is already the second-most cited obstacle for businesses, right after unstable electricity x. This is also the case in Nigeria.

Summary The outcome of the survey on Technology states that lack of access to credit facility remains a major issue. However, more and more capital is efficiently flowing in the private capital markets. The government and other stakeholders should understand what changes have taken place to encourage capital formation in the private sector and further foster that.

Lack of access to credit facility is a major stumbling block for a business start-up in Nigeria. Financing is mainly provided by friends and family. Enterprises in Nigeria find it difficult to access financing from commercial lenders such as banks, as they often have strict requirements that enterprises cannot meet. Where financing is available, it is often too expensive. Also, enterprises are not aware of the alternatives sources of financing available. They often don’t have the skills, time or network to seek connection with potential investors. There are few angel investors or venture capitalists in Nigeria. Altogether, this translates to a great lack of available funding for entrepreneurs.

The private sector and banks are becoming increasingly interested in supporting crowdfunding platforms financially. However, they are waiting for proof of concept; can crowdfunding be profitable in Nigeria? Local Angel investors, such as Lagos Angel Network, are now starting to invest in early stage businesses in Nigeria. In addition, Venture Capitalists from the US and EU, e.g. 500Startups and TLcom are entering the market. Other investors make investments through Venture Capital D

IFC, 2010, Scaling-Up SME Access to Financial Services in the Developing World

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III.

Crowdfunding Potential for Nigeria in 2017

It is believed that Nigeria can possible create an effective crowdfunding industry in Nigeria. Firstly, with a fast growing population of 179 million, where 84% has mobile connection and over half of the population is already active on Internet, there is a strong social media usage and a great network of family and friends. Secondly, the entrepreneurial scene is booming. Thirdly, effective payment solutions are in place.

Other major concerns according to this report are lack of trust and access to credit facility. These challenges will not be easy to tackle, yet ambitious entrepreneurs in Nigeria are utilizing innovative strategies to overcome these obstacles when raising money from the crowd.

Other initial steps could include: •

The crowdfunding ecosystem, however, consists of more than technology and culture of entrepreneurship. The most pressing issue in 2017 is obviously regulation . The 2016 ban on equity crowdfunding in Nigeria is seriously slowing down the introduction of crowdfunding in the country. To move forward, donation and reward based crowdfunding should be fostered as a first step towards crowdfund investing. These types of crowdfunding have successfully paved the way for equity based crowdfunding in other regions. Since the authorities in Nigeria struggle with the regulation on equity based crowdfunding, the situation demands a proactive attitude from existing platforms and crowdfunding associations.

•

•

•

Crowdfunding platforms and other stakeholders bundle forces and work on new legislation with the government. Crowdfunding platforms using the power of social media to promote their cause. Encouragement from the government to use donation and reward based crowdfunding. More importantly, a regulatory framework is essential to promote capital formation while protecting investors. Create external linkages for additional capacity, for instance with the AfcA or peers in the EU and US. As the goal of this report is to determine the current crowdfunding potential for Nigeria and to add to the discussion on crowdfunding in Nigeria and West Africa, a new assessment will be made in 2018.

Platform Donate-ng.com Imeela

Launch 2015 2016

Type Donation Donation

Naturad Malaik Expected TheNextEconomy

2016 2015

Donation Equity

Targets Charities Designers, musicians, entrepreneurs Charities Entrepreneurs Entrepreneu rs

2017

Donation

Entrepreneurs Entrepreneurs

Funded amount 10 MlN Naira (=32.000 USD) xi Marginal

Marginal Marginal

D)

exchange rate based on www.xe.com January 1st 2017

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About About the author Suzanne Wisse – Huiskes is an internationally recognized crowdfunding expert. As a frontrunner and Strategic Consultant (MatchBox Consultancy), Suzanne aims to advance the field of alternative finance in the EU and Africa. Benefitting from over 10 years of experience, she pushes crowdfunding in developing markets in cooperation with platforms, impact investors and NGO’s.

About the CrowdfundingHub CrowdfundingHub is the European Expertise Centre on Alternative Finance and Community Finance. With a core team in Amsterdam and local experts throughout Europe, they are a re a research and consultancy network of crowdfunding and alternative finance experts. CrowdfundingHub CrowdfundingHu b is initiated in 2015 by Ronald Kleverlaan, Kle verlaan, an a n advisor to the European Commission and co-founder of the European Crowdfunding Network.

Originally from the Netherlands, she was most recently based in Nigeria (20142016) and the UK (present). During her time in Africa, she worked closely with banks, platforms, entrepreneurs, corporates and other crowdfunding stakeholders on various assignments. In addition, Suzanne is passionately involved in mentorship programs that challenge ambitious African entrepreneurs, such as the Tony Elumelu Foundation and the Mandela Washington Fellowship. All comments and feedback on this report are welcomed and appreciated. Kindly contact the CrowdfundingHub or the author ([email protected] ([email protected] ).

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Crowdfunding Potential for Nigeria 2017 - CrowdfundingHub

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