Is Crowdfunding for You?
Let’s say you attend a small business convention to seek out potential investors to develop a new product. With each new contact, you share details about your latest business idea. You try to generate excitement about your idea, one person at a time.
Now consider having the same conversation with thousands of investors all over the world. That’s the essence of crowdfunding. If you’re interested in crowdfunding for your business, however, there are a few things you should know.
How it works
As the name implies, crowdfunding is the practice of pooling small investments from a large group of people to fund an activity. It can replace a bank, friends or private investment companies to start a company, fund the development of a new product or create a new service.
There are many online crowdfunding platforms, including Kickstarter, Indiegogo, Republic, CircleUp, Crowdfunder and GoFundMe. Each site requires that you set up a profile, establish a funding goal and publish your financing request. People can then donate to your cause or purchase shares in your business.
Of course, investors and contributors expect some form of reward for helping out companies through crowdfunding. For those donating to a non-profit organization, the reward might be as simple as a handwritten thank-you note or a tax deduction (if applicable). Others might gain early access to a discounted product. Some might invest with the expectation that share values will increase over time (known as equity-based crowdfunding). Others might purchase debt-based shares with a fixed interest rate (crowdlending).
What to consider before crowdfunding
Whether you’re considering an investment or trying to raise funds for a new product, ask yourself the following questions:
- Are you comfortable broadcasting your plans? Be aware that competitors will have access to your idea and business profile. One of the initial developers of a digital watch, Pebble, used crowdfunding to fund their product only to see their business idea overtaken by others including Apple.
- Are you prepared to create an appealing campaign? Review the crowdfunding site and see what appears to be working. You will need to be prepared to create an appealing campaign that will stand out on the crowdfunder’s site.
- Will this platform reach my target investors or users? Different crowdfunding platforms focus on specific funding pools. Find out what would be the best for your business.
- What’s the fee structure? Understand the models and the costs associated with the platform’s fundraising practices.
- How much money do you plan on raising? Most crowdfunding requests are small. That makes the individual risk for any one donation or investment small as well.
- How much time will be allotted to reach my funding goal? Companies levy fees to process investments or pledges, and you may be hit with increased charges if targets aren’t met.
- What about shipping? Don’t forget to specify shipping terms in your campaign narrative and budget for those costs, when needed.
Crowdfunding is worth consideration as an alternative to traditional financing. But before you sign up, be sure to study the details.
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