Crowdfunding: A Non-Traditional Path to Growth

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Crowdfunding can raise capital for your new business venture by tapping into a wide pool of friends, family, strangers and supporters who can be reached through the internet. This is a perfectly legitimate—and often highly efficient-- way to raise funds, but taking this path may require a leap of faith and careful attention paid to process and approach.

While traditional investment bids target banks, lenders, corporate donors, and a few large-scale individual investors, crowdfunding targets a much wider audience who often contribute much smaller individual amounts. Just like traditional investors, small crowdfunding contributors will expect to receive something or see some results in exchange for the support they offer. But unlike large investors and prospective shareholders, crowdfunders are often satisfied with a much smaller (or direct) return instead of much bigger (but perhaps riskier) pay-off in the distant future.

If you’re ready to turn the funnel around and direct your fundraising efforts to a wide audience with shallow pockets (instead of the reverse), crowdfunding may be a perfect fit for you. Consider the three types of options available to you: donation-based, rewards-based and equity-based fundraising.

Donation-based crowdfunding offers no financial returns to contributors and is often used to solicit charitable donations or support non-profit projects. It’s an available option, but rewards-based and equity-based fundraising may be better suited to a new for-profit business launch.

Rewards-based crowdfunding offers contributors a non-financial form of “compensation”, like products or services, in exchange for their support. This can be a simpler and less expensive incentive than ownership stake, and it often appeals to new business owners because it comes with low initial outlay. Platforms like Fundable, Kickstarter and Indiegogo typically fall into this category. Keep in mind that if you are offering a reward, you are entering into a contract with each purchaser to provide that reward on the terms you are offering. This is a binding legal obligation, and you may be subject to a lawsuit for breach of contract (or even fraud) if you fail to deliver the reward.

Equity-based crowdfunding lets contributors trade capital for equity shares, allowing them to become part owners of the company. The exchange is similar to traditional fundraising, but again, the funnel is reversed; the audience is much larger but individual contributors/shareholders engage in smaller transactions. As company profits begin to grow, contributors receive some of those profits in the form of distributions and dividends. Equity-based crowdfunding is still in its infancy and is a heavily regulated space. You’ll want to work with a reputable platform to ensure a pain-free raise.

Crowdfunding isn’t for everyone. And this strategy still requires a strong, multi-stage development process that will include a marketing plan, a business plan, pitch development, product presentation, and a willingness to accept and act on feedback if your audience and product don’t mesh perfectly. You’ll also need to make sure that the crowdfunding raise is consistent with a larger investment strategy. All of these things require time, money, and specific skill sets.