In my previous column, we kicked around some ideas for funding a business. In particular, the topic of funding for new businesses was at the forefront, as these entities are often caught in a bind where they may be asked to produce two or three years of historical financial records before they can qualify for a loan.
That can be awkward if a business doesn’t even have a month’s worth of financial records to show.
With loans and self-funding being the most common options for funding a business (with grants coming in at a distant third place in my rankings), there are two other options we haven’t yet explored: crowdfunding, and its sibling of angel investing and venture capital.
Let’s dissect crowdfunding.
Most of us have probably bumped into crowdfunding platforms like GoFundMe or Kickstarter. From efforts to help cover a neighbor’s cancer treatments, to raising money for the purchase of high school band uniforms, crowdfunding has become a standard approach for communities to come together, pool their resources, and support a cause.
While raising funds to help a neighbor recover from an accident is a great use of crowdfunding money, it’s a different story when it comes to funding a business.
Prior to 2012, the vast majority of startup business investing was done in the circles of either “friends and family” or “accredited investors.” Accredited investors are those high income and/or high net worth individuals with some money to burn. Coming out of the 1929 stock market crash and the Great Depression, the newly minted Securities and Exchange Commission held the (then, pretty easily justifiable) view that local investing should be restricted to only those who could afford to be swindled.
With the bipartisan passage of the JOBS Act in 2012, the regulatory landscape changed significantly regarding the ability of individuals to invest directly in companies. Now businesses have the option of raising funds through non-accredited investors.
With platforms such as StartEngine taking advantage of the recently loosened regulations, companies are now able to sell equity in their companies to unaccredited investors. If you’d like to see it in action, Aquipor, a Spokane-based company, has raised over $3 million in crowdsourced funding: https://www.startengine.com/offering/aquipor
The are many benefits of crowdfunding for businesses that can open whole new vistas for startups. As a quick snapshot, here are a few of the advantages that spring to mind:
A successful crowdfunding campaign can serve as proof that a business idea is viable. It allows entrepreneurs to gauge interest in their product or service before fully committing resources to production or development. In short, it tests the “Build it and they will come” theory.
Crowdfunding allows startups to raise funds from a large pool of individuals from around the globe, potentially allowing them to tap into more funds than what might be available through local networks of friends and family.
A successful crowdfunding campaign can generate its own media attention and can serve as a marketing tool to raise awareness about the startup and its offerings.
Crowdfunding enables startups to engage with their fans. This community can provide valuable feedback, support, and advocacy for the business. It never hurts to have a large cheerleading squad backing your business.
Those are some of the upsides of crowdsource funding. But as life tends to go, upsides are generally matched by a few downsides. Let’s look at some of those:
Running a successful crowdfunding campaign can require significant time and effort. It doesn’t just happen on its own. It is in the entrepreneur’s interest to create compelling campaign materials, engage with potential backers, and actively market their campaign.
Crowdfunding success is not guaranteed, and many campaigns fail to reach their funding goals. If a company doesn’t raise enough money, they need to have a solid plan of how they are going to return their investors’ money, a.k.a., have your business attorney in on the plan.
Most crowdfunding platforms charge fees for hosting campaigns. These expenses can quickly eat into the funds raised and reduce the net proceeds of the campaign.
Crowdfunding backers are typically individual consumers rather than experienced investors. As a result, they may not have the same level of expertise or understanding of the risks associated with investing in startups, potentially leading to unrealistic expectations of the business. Also, one of the benefits of bringing on investors is for the business to be able to tap into those connections and expertise. That tends to be more problematic in the crowdfunding world.
Crowdfunding is still subject to various legal and regulatory requirements, depending on the jurisdiction and the type of crowdfunding model used. Failing to comply with these regulations can result in fines, legal issues, and huge headaches, a.k.a., have your business attorney in on the plan.
While crowdfunding offers many advantages for startups, it isn’t for everyone. There is a complex yin-yang balancing act to consider between the potential benefits and drawbacks.
Well…as it turns out, I had enough to say about crowdfunding that we’ve run out of room and we didn’t even make it to the discussion of equity funding through angel investors and venture capital. Adding it to the docket for next month!
Mark Pond, MLIS, has been the Business Research Librarian with the Spokane Public Library since 2006, and, before that, worked in similar capacities for the Seattle Public Library and the University of Washington Libraries since 1998. Mark has led the effort to develop Spokane Public Library into a nationally recognized leader in the field of business research.
