Crowd funding is a popular new way to raise money for your start-up, but it isn’t perfect. Avoid the pitfalls associated with grassroots financing and learn how it can lead traditional lenders to approve a loan for your new business. Use the following tips to make the most of your crowd funding proposals.
Crowdfunding Your Startup
The Basics of Crowdfunding
In the past, new businesses didn’t have many financial options besides bank loans or possibly the help of one or two individual investors. They relied heavily on savings and personal finances to get started. The rise of the Internet has had a serious impact on business funding, as has the recent fluctuations in the economy.
Venture capital groups that used to provide funds to burgeoning businesses aren’t just pulling back on start-up investments; they are pulling back on all investments. Banks are becoming more cautious and expecting to see progress before putting their own money on the line. Affluent individuals who typically invest in start-up businesses are increasing, but they haven’t been able to fill the gap on their own.
This is where crowd funding becomes a major player. These days, a new type of business funding is available online. Crowd funding, where a large number of individuals are invited to invest in a business in exchange for some form of compensation, is fueling a tremendous number of projects that otherwise would be denied financing.
Funding Tomorrow’s Best and Brightest
Crowd funding is popular from the perspective of the business owner and the investor. Ideas that wouldn’t normally be developed can get funding that otherwise wouldn’t be available. Owners can easily post their business proposals and request help with financing in a matter of minutes.
On the flip side, investors can give a small amount of money and be part of something they feel is important. They can meet the needs that are important to their own lives and often get something in return. Sometimes they even receive shares in the company’s ownership.
While crowd funding is an attractive option for business owners who are in need of cash and are confident their ideas will work, it can also be a problem down the road. For instance, it’s much harder to get traditional financing when a business is owned by hundreds of people. Businesses also have to deal with the demands of multiple individuals with personal stakes in their company. This process takes time and patience, sapping precious funding and work time away from development.
Token gifts like window decals can lend a sense of ownership and pride that encourage small investments. Larger donations need to be backed by something of substantial value. For instance, when the Ouya, an independent gaming system based on Android technology, sought funding over Kickstarter, they offered investors who pledged $699 or more a developer’s kit.
Sites like Kickstarter, Fundable, AngelList, Indiegogo and other crowd funding portals have garnered the attention of industries and investors alike. The convenience with which a person can create or contribute to a campaign means businesses can get immediate funding. Projects run the gamut from children’s books to food stands to developing mobile applications.
The Fringe Benefits of Crowdfunding Campaigns
Proposals that do well have obvious and immediate benefits. There are fringe benefits, however, to getting the crowd funding approval. In addition to spreading the word about your business and getting community support, you immediately prove there is a need you can fill. That’s especially helpful in terms of convincing traditional lenders to invest in your company.
The other benefit comes from campaigns that fail. If you set up a proposal and don’t meet your goals, all of the pledged money is returned to would-be investors, and you’re faced with going back to the drawing board. This is actually a good thing, according to industry experts, because it shows you that your business may not be viable. You know you don’t have a workable business as it now stands.
The ease of scrapping a crowd funded project is a benefit in itself. You prevent major problems by dealing through a third-party. There’s no risk of spoiling your reputation or creating unexpected debt, two major obstacles to gaining support on a new project in the future.