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Is Crowdfunding Right For Your Business?
Crowdfunding sounds like the best possible source of financing. The company sends out a request for money, the dollars roll in, the contributors get no equity leaving the entrepreneur with 100% control and the money doesn’t need to be paid back! Is crowdfunding the nirvana of capital raising?
To date crowdfunding has mainly been of the donation or rewards variety. This means that in exchange for a financial contribution to a business, a person would receive some token output from that business. Crowdfunding of this variety has a long history in the arts and the funding of creative projects. The “reward” might be a CD from a musician or a game from a video game producer. Pure donations are also made in which the contributor contributes to a project simply because they believe in the vision.
Essentially, rewards based crowd funding is a systemization and expansion of the friends and family round of financing in an entrepreneur’s lifecycle. Creative projects that have a business to consumer orientation seem best suited for this type of funding. If your business has a compelling story that the average person can relate to it may be a good candidate for crowdfunding.
Perhaps the most famous platform of this variety is Kickstarter. Since inception Kickstarter has received pledges of over $1 billion. Approximately 44% of firms that started the process have successfully raised their desired funds and most raise less than $10,000. Kickstarter focuses on creative projects and charges 5% of the money raised as a fee.
Recent changes in SEC regulations are allowing a more traditional form of “investment” crowdfunding to make capital even more available to entrepreneurs. In April 2012 Congress passed the JOBS (Jumpstart Our Business Start-ups) Act which allows equity sales to accredited investors to be made through crowdfunding sites. Crowdfunder is a leader in this arena. They are simultaneously creating lists of accredited investors (investors with either $1 million in assets not counting a primary residence or income greater than $200,000 in each of the past two years) and projects needing funding. The site serves as a sort of clearinghouse which reduces search costs for both investors and companies and should dramatically expand investment opportunities and startup’s access to capital. Unlike the donation/rewards based funding, investment based crowdfunding is actually selling shares in a company in exchange for the investment. Ultimately, when the SEC is finished formulating rules, any investor, not just accredited investors, will be allowed to participate in crowd based funding.
In any case it is up to the entrepreneur to sell their business concept to potential contributors. This means it is up to the entrepreneur to package the pitch, create the excitement and drum up interest. Individual investments tend to be small and in some cases, if the full amount is not raised, no money changes hands. On the positive side, crowdfunding has the potential to democratize the fundraising process, increase access to capital and stimulate small business growth. You can read more about crowdfunding and other sources of finance in Raising Entrepreneurial Capital by Vinturella and Erickson.
About the Author
Dr. Suzanne Erickson received her PhD in Finance from the University of Washington. She taught at Seattle University for several years where she was instrumental in starting the Entrepreneurship Center. Currently she is the Associate Dean in the College of Business and Mass Communication at Brenau University in Gainesville GA. Her areas of expertise are Corporate Finance, Valuation and Entrepreneurial Finance.
In addition to publishing several articles in the areas of corporate finance and Raising Entrepreneurial Capital, a text coauthored with John Vinturella, she has consulted with several start-ups, Fortune 500 companies and non-profits.
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