by Justin Grensing, Esq., MBA
One of the most difficult aspects of starting a new business is raising some start-up capital. It’s great if you have sufficient savings built up to keep you going for a few years – yes, it often takes at least that long to start turning a profit – but that isn’t the reality for many entrepreneurs. In addition to the costs of running the business itself – which could include rent, marketing, utilities, raw materials, staff wages, etc. – entrepreneurs are often leaving an existing job, foregoing a steady paycheck.
Traditionally, start-ups are frequently funded by one or more of the “3Fs”: family, friends and fools. The “fools” in this case are those who don’t know you but think you have a solid business idea. While these are typically wealthy individuals, or in some cases funds or venture capitalists, a new trend has opened up this category to a much broader pool of potential investors: crowdfunding.
Crowdfunding is the process of pursuing a fundraising goal through a large network of small contributors – the crowd. Instead of needing one or two wealthy bankrollers, you might have hundreds or thousands of people donating a few dollars each. “The most common type of crowdfunding fundraising is using sites like Kickstarter and Indiegogo variety, where donations are sought in return for special rewards. That could mean free product or even a chance to be involved in designing the product or service,” explains Entrepreneur. “It is also possible to use crowdfunding to assemble loans and royalty financing. The site LendingClub, for example, allows members to directly invest in and borrow from each other, with the claim that eliminating the banking middleman means “both sides can win” in the transactions.”
So how does one tap into this seemingly lucrative source of funding? Here are some basic tips:
Think Carefully About How Much You Need
Some crowdfunding platforms return all the money to the contributors if the goal is not achieved. This means that if you are too ambitious (greedy) you might end up with nothing at all. Lawton Ursrey, in an article for Forbes, suggests breaking up your needs into discrete segments and having a distinct campaign for each segment. “Don’t ask for everything at once,” he writes. “Focus your crowdfunding requests on specific parts of your business or certain phases of development.”
Do Whatever You Can to Stand Out
Often, crowdfunding is essentially “free” money, in the sense that in some forms you aren’t giving up equity or committing to pay anything back. Unsurprisingly, many people are interested in this opportunity, so you need to make yourself stand outd. “A successful crowdfunding campaign relies on your ability to capture potential investors’ interest,” write Erin el Issa and Jackie Zimmermann in an article for NerdWallet. “It means you have a unique product that fills a consumer void and a strong personal or business story that compels investors to give you a chance.”
Include Some Seed Money
On most platforms, potential contributors can see how much money you’ve already raised. Ursrey suggests including some initial money in the pot when you start your campaign. “Nobody wants to be the first to jump in the water. As with traditional funding, the psychology of things is a factor in producing the desired outcome – getting funded. Increase your chances on crowdfunding by starting out with some initial investment. Assemble a starter crowd to draw attention to your pitch and make investors more interested.” Think of it as the entrepreneurial equivalent of a bartender putting a few of her own dollars in the tip jar to make it look like other people have been tipping generously.
Starting a new business has numerous challenges, and raising sufficient capital is often one of the most difficult. Crowdfunding might not be perfect for every entrepreneur or every business, but why overlook any potential source of funding?
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Tags: business capital, Business development, business startup, crowdfunding, crowdsourcing, funding, venture capitalists