Mariam, 25, has the biggest idea yet – a farming business that can rake in as much as N5 million per month as profit in as little as six months. Like is true for many other entrepreneurs, her business idea is only an idea without capital.
There is a wide range of options for Nigerian entrepreneurs to seek fund for their businesses, but in reality, these avenues do not easily accommodate start-ups.
For instance, until recently loans which banks reluctantly offered to start-ups cost more than 25 percent, and the mere process of application seemed designed to frustrate the entrepreneurs.
This is not a problem peculiar to start-ups alone as only 5 percent of SMEs said they have a loan even though 80 percent of them seek financing, according to a World Bank estimate in 2012.
The non-availability of credit from lenders made options like bootstrapping, angel investing, and love fund the pragmatic choice for start-ups.
Despite regulatory roadblocks, crowdfunding has also been a go-to for entrepreneurs.
For instance, Techpoints, citing the Nigerian Startup Funding Report 2018, said that three Nigerian startups collectively raised millions of dollars two years ago.
Crowdfunding is the pooling together of small amounts of capital from a large number of individuals who commit money to companies typically via the internet.
Some types are Peer-to-Peer Lending, Reward-Based Crowdfunding, Donation-Based Crowdfunding, Equity Crowdfunding and Real Estate Crowdfunding.
The difference between the aforementioned is based on how the platforms operate. For example, Equity crowdfunding allows people to contribute money to be invested in a company or project in exchange for part ownership.
Popular crowdfunding platforms worldwide are Kickstarter, GoFundMe, Indiegogo and Patreon.
According to a report by India-based research firm Valuates Report published last year, the global market for crowdfunding is estimated to be $10.2bn in 2018 and is expected to reach $28.8bn by the end of 2025.
In Africa, Europe-based CrowdfundingHub says as much as $83.3 million was raised by crowdfunding platforms 2015, although Nigeria accounts for just 10 percent of this.
CrowdfundingHub noted that a 2016 ban on equity crowdfunding by Nigeria’s Securities and Exchange Commission (SEC) was a drag on the alternative financing industry although it noted that “…ambitious entrepreneurs in Nigeria are utilizing innovative strategies to overcome these obstacles when raising money from the crowd.”
These platforms include the likes of Naijafund, NaturFund, Fundanenterprise, and Farmcrowdy which have helped thousands of businesses raise capital and fund projects.
While SEC’s concerns have not been unfounded due to the prevalence of fraud in the country, a turnaround to regulate crowdfunding would likely be a win for all parties.
Regulation by SEC would increase transparency and safeguard investors’ wealth whilst giving legitimacy to crowdfunding.
“Crowdfunding helps deepen the market by providing an alternative investment opportunity,” said acting SEC Director-General Mary Uduk.
A move to regulate crowdfunding might involve directing operators to maintain a capital buffer, limit the amount investors can commit to a type of crowdfunding venture, and set guidelines on best practice for all.
The effect would be an industry that would be strengthened to provide capital for the growing entrepreneurship ranks in the country.
Retail investors would also be able to diversify their portfolio without taking unnecessary risks in ventures not backed by any regulator.
Also, as more platforms emerge and public awareness grows, the cost of raising money for businesses will likely trend lower.
