Is Crowdfunding Right For Your Business?
In the past would-be business owners might ask friends and family to invest in their business or perhaps ask the bank for a loan. Then came a FinTech innovation that changed all of that: crowdfunding. Let’s take a look at two different types of crowdfunding and see if either one could be a good idea for your small business.
How “Traditional” Crowdfunding Works
Crowdfunding first came to prominence thanks mostly in part to one site: Kickstarter. As the platform grew, larger and larger projects flocked to the site including the Pebble smartwatch and a movie adaptation of the TV show Veronica Mars. Similar sites such as Indiegogo, FundAnything, and several others have now also joined the space — each with their own quirks and advantages — but Kickstarter still remains the most popular.
Today some tech companies complete entire rounds of funding through these platforms, forgoing the venture capital firms altogether (at least for a little while). Furthermore crowdfunding sites can be great for launching new products and tech gadgets as a strong campaign can create serious buzz, even going viral in some cases. Additionally, since campaigns are expected to offer rewards in exchange for donations, many companies have taken to essentially turning the site into a pre-order portal, allowing them to produce a run of their product without having to put up their own capital.
Unfortunately this model leaves a hole in the market for companies who might not have a unique product they’re looking to produce or those that offer services instead of goods. In fact Kickstarter and Indiegogo have strict rules about what can be funded using their sites, which would exclude a great number of businesses. As a result entrepreneurs should be careful about which platform they choose and may ultimately find that “traditional” crowdfunding just won’t work in their case.
What is Equity Crowdfunding?
For businesses that don’t quite conform to the limitations of regular crowdfunding models there is another option. Instead of offering a pre-order of a product or other rewards to funders, equity crowdfunding allows entrepreneurs to raise capital by taking on investors who will earn a return should the business succeed. Prior to this year the practice of equity crowdfunding was limited to a small number of accredited investors but, thanks to the JOBS act, which has finally gone into effect, the pool of potential investors has been widened significantly.
Interestingly, despite the changes to equity crowdfunding, Kickstarter and others have said they’re not really interested in going that route with their platforms. This has allowed sites like SeedInvest, Crowdfunder, and Fundable to take on the market instead. Although these types of platforms are decidedly more business minded and require a lot more information than a Kickstarter campaign, the basic functionality is comparable — individuals contribute varying amounts of money to help you reach your funding goal.
Overall equity crowdfunding platforms offer a lot more flexibility for entrepreneurs. For example businesses can select what type of security they’re looking to offer (preferred equity, convertible notes, ect.) while also setting a cap on how much they’d like to raise. However, this brings us to the biggest downside: you’ll be giving up a piece of the company. Additionally, while platforms are mostly open to any type of business, the interest investors might show in, say, a local coffee shop might not be very high when compared to the next big mobile app sensation. This should be taken into consideration and, once again, you may find that this method of raising capital just isn’t a match for your idea.
The Bottom Line
Regular and equity crowdfunding can be a great way for businesses to launch or expand without incurring debt. There is also the potential to earn some publicity for your business and even garner feedback during the course of your campaign. However the truth is that one or neither crowdfunding option will be right for every business. Ultimately the best plan of attack is to research past campaigns for companies similar to yours and evaluate how well they performed. Additionally, if you do decide to move forward, have a well thought out plan for 1) how you will promote your campaign and 2) how you’ll spend the money should you receive your funding in order to achieve what you said you would — never let your investors or funders down! Good luck.