Wednesday, March 31, 2010

Crowdfund brings community financing

SA lacks an angel funding network to help online start-ups develop prototypes of their products.

This is the view of Eve Dmochowska, one of the board members of a new initiative, the Crowdfund. “SA cannot compete in the global online sector if it isn't funding start-ups in the beginning stage,” notes Dmochowska, adding that venture capitalist firms are mostly interested in investing large sums of money for proven ideas that generate revenue.

According to Dmochowska, the concept for the Crowdfund started about a month ago, and the initiative has been successful. “I don't know what the benchmarks are, but also I don't have to. A million rand in under a month is very favourable.”

The Crowdfund works by getting masses of people together who invest R1 000 or more, up to a limit of R10 000, she explains. Dmochowska says the investment amount is kept small so should the investment be lost, it becomes immaterial.

When asked about the average amount people were prepared to pledge, Dmochowska said individuals were willing to contribute around R3 000 each.

She says the money is pooled into the Crowdfund, a trust being managed by legal firm Bowman Gilfillan. “Everything is governed by the board and its trustees,” she adds.

“The Crowdfund board approves the use of the fund to finance between 10 and 20 teams that have excellent ideas, with the goal of converting the ideas into workable prototypes in exchange for equity,” she explains. “It also provides valuable mentorship, facilities and services where applicable.”

Dmochowska notes that the economies of scale play a role in the Crowdfunding initiative, which refers to the way pooling a large number of small investments creates a much higher capital.

“Once a workable prototype is developed, a formal venture capitalist network is approached for further funding, at which point the Crowdfund most probably cashes out.”

Dmochowska says there are six criteria that potential entrepreneurs must meet in order to apply for Crowdfunding. “It needs to be an online technology, and must have global applications and aspirations. It must be innovative, appealing, and have a viable and clearly defined business model.”

She adds that the project must be able to complete stage one of the development process within the budget of R50 000 to R100 000.

With the threat of social engineering and scams prevalent as the 2010 Soccer World Cup approaches, ITWeb asked Dmochowska about the potential threat of scams, as the concept could be a mechanism for scamming people out of money.

“Scams from where?” she says. “We don't just hand over money... we work very closely with the start-up all the way.”

According to Dmochowska, the Crowdfund only started officially accepting submissions yesterday, and have already received quite a few submissions.

“We will only start accessing each of the submissions from next week, when we have our first board meeting. But there are definitely some that I think have great potential,” she concludes.
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