Can it sustain a business?
Did you hear about the guy who raised $50,000 to make a bowl of potato salad or the Demon Plush toy company that raised $28,000 to expand their toy business? Both ventures were launched on crowdfunding websites and found unlikely investors in the general public. Crowdfunding is a reimagined version of grassroots funding options. Long before banks and business loans, individuals interested in starting a business would go to friends and family to raise capital. The advent of the Internet has allowed grassroots effort to expand further, and reach millions of eyes in a matter of days or weeks. So, is this type of funding an option for you?
What is Crowdfunding?
Crowdfunding, popularized in the last five years, is a means of investing that turns the traditional investment funnel upside down. In a conventional investing round, you, the business owner, would need to spend months vetting investors and networking to get in front of the right eyes. You’d need to spend time sifting through your finances, proving yourself worthy, and pitching to banks and angel investors across the country. Funding platforms allow you to get in front of a large audience of both investors and ordinary citizens to pitch your idea.
Crowdfunding is popular among startups that are looking for upfront capital to turn a concept into an actual product or service. People can invest whatever they want, and you, as the owner, can offer rewards based on levels. For example, a $20 investment may garner a first-run product or a commemorative mug, a $5,000 investment may make the investor a stakeholder in the business. All of your business pitches and ideas are organized on the funding platform. When you meet your goal, the money is paid out by the platform, minus the fees associated with using the service.
Can Crowdfunding Help your Business?
The answer isn’t as simple as yes or no. Crowdfunding can be a viable way to inject a startup with capital or get over business hurdles, but it certainly isn’t a way to sustain a business long term. Problems can arise when a business owner uses crowdfunding to deal with day-to-day operations costs or overhead. If there is trouble with the books or cash is tight, you are better off looking for help in the form of a business advisor or financial advisor who can look over your books and figure out why your business isn’t in the black. Kickstarting investment through a funding platform would, at this point, be a short-term solution to a more complex and long-lasting issue.
When Should you Use Crowdfunding?
Before you decide to set up a crowdfunding campaign, it is important to consider what your goal is and how you plan to utilize the funds collected. You should consider crowdfunding if you have something to give back to investors. For example, an expanding eatery might offer investors a free meal, or a ticket to a grand reopening party. You can choose to set up tiers of investment with different gifts or perks.
Crowdfunding can also be used by startups looking to inject their company with quick cash for expansion or the realization of an idea. The startup should have a set business plan and have some of their groundwork done before setting up a campaign. For example, if you need a patent for your product, you should consider applying for that before you open up a round of funding.
Now that you know the basics of crowdfunding, you’ll need to decide if that is the right choice for your business. While crowdfunding can be a great way to reach a large group of people and source investment for business expansion, it is not for every company and every type of need. Be sure to do your research before setting up a campaign, and remember that any investment, from any source, needs to be adequately investigated.
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