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Crowdfunding – Is it Right for Your Business? Where Do You Start?

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Crowdfunding – Is it Right for Your Business? Where Do You Start?

By Caron_Beesley, Contributor
Published: July 8, 2013 Updated: July 8, 2013

Heard the buzz about crowdfunding but not sure how it can help you finance your business? Is crowdfunding even right for you?

Here’s some information and tips that will help explain crowdfunding concepts and how you can take advantage of them to fund your business.

What is crowdfunding?crowdfunding image

Crowdfunding is a collective cooperation of people who network and pool their money and resources together, usually via the Inter­net, to support efforts initiated by other organizations. Unlike angel investments, in which an investor takes a large state in a small business, with crowdfunding, you can literally attract a “crowd” of people – each of whom takes a small stake in a business idea by contributing towards an online funding target. This spreads the risk among backers and creates a strong network of support for your business. If you offer equity as part of your package, your investors can also become ambassadors for your brand.

With the tough economic climate, crowdfunding has become a popular and alternative method of raising finance for a business, real estate investments, projects or ideas and has become popularized online by sites such as Kickstarter, Wefunder, crowdfunder and RockthePost.

IMPORTANT: Large crowdfunding investments are currently limited to SEC-accredited investors. Change is coming, however, and soon the investors like you and I will be able to enter the crowdfunding market. Currently, the amount an un-accredited investor can invest is capped at 5-10 percent of your income. More on this below.

Crowdfunding to become a lot easier for small businesses

Following up on from my last point above, it will soon become a lot easier for small businesses to raise money online via crowdfunding thanks to the signing into law of the JOBS Act by President Obama in April 2012. However, the SEC is still in the rule-making process and is due to publish final regulations before non-SEC-accredited investors can start financing small businesses. Final rulings are expected this summer.

What does the JOBS Act enable? Well, businesses seeking crowdfunding will be able to raise as much as $1 million a year without having to do a public offering – a step requiring state-by-state regulations. Previously, small businesses were also limited to seeking investment from SEC-accredited investors only; non non-accredited investors (you and I) can invest in start-ups.

How to prepare your business for crowdfunding

While the JOBS Act should be implemented soon, here are a few things you can do to get ahead while you wait.

  • Incorporate your business – It’s possible that only C corporations will be in a position to take advantage of crowdfunding opportunities. This is because S corporations have a 100-shareholder limit, effectively precluding the use of crowdfunding. Talk to a lawyer or a local small business organization like your SBA District Office or SCORE to help you explore and select the right entity.
  • Start writing or refining your business plan – This will help you determine the amounts of financing you are looking to raise. It can also help you outline your business expectations and alleviate any concerns potential investors may have about how valid your venture is and how serious you are about it. SBA’s Build a Business Plan tool can help you walk through these steps. It’s an easy-to-use interactive online template that you can work on, save anytime and download when you’re finished.
  • Get your accounting records in order – Part of the new JOBS Act will require entrepreneurs to follow SEC-compliant guidelines in regard to providing accurate, transparent and up-to-date financial statements and due diligence reports. Balance sheets, cash flow statements, financial projects and more will help you build your credibility with potential investors and are required before you even launch your fundraising campaign, so be prepared.
  • Get your CPA or accountant involved – Be sure to consult with a qualified CPA to stay on top of legislation. If you’re seeking between $100,000 and $499,000, then then you’ll need to have your financial statements reviewed by an independent public accountant. Over $500k? Then you’ll need to have those statements audited. It’s never too early to get started with this process.

Tips for successful crowdfunding

One key to getting what you want from crowdfunding is understanding the commitment it entails. This means having a careful strategy. Start by perfecting your pitch. Keep it simple. If your pitch doesn’t connect with your target investors, then crowdfunding may not be for you.

Next, make sure you have the resources in place to promote your pitch daily (and keep it simple – you want to make it easy for prospective investors to connect with your idea). Create and maintain momentum by being responsive; take calls, answer emails, use social media or an email list to help you meet your target.

Think about ways to create a buzz around your business. Find out who your potential investors are well in advance of your listing and find out what entices them to invest. 

Be prepared for questions from investors now. How do you plan to spend the money? Do you have an exit strategy? What are your short- and long-term goals? What insurance protection do you have in place for your business and investors? Have you completed the due diligence process? Do you have trademarks, patents or copyright in place?

Some tips about crowdfunding sites

Existing crowdfunding sites are probably your best option when it comes to raising funds. If you want to set up your own crowdfunding portal, you’ll need to get SEC approval.

Remember, third party sites are essentially middlemen; they make points of fees by matching up companies or individuals to raise funds. To ensure you are doing the right due diligence, it’s well worth consulting both an accountant and a lawyer to protect your interests.

More Information

For more tips, check out SBA’s Introduction to Crowdfunding for Entrepreneurs, an online, self-paced overview of the topic that also includes some useful next steps for those interested in the process of crowdfunding.

About the Author:

Caron Beesley

Contributor

Caron Beesley is a small business owner, a writer, and marketing communications consultant. Caron works with the SBA.gov team to promote essential government resources that help entrepreneurs and small business owners start-up, grow and succeed. Follow Caron on Twitter: @caronbeesley

Comments:

I've just graduated from banking academy, this topic was so useful
Large crowdfunding investments are currently limited to SEC-accredited investors. Change is coming, however, and soon the investors like you and I will be able to enter the crowdfunding market. Currently, the amount an un-accredited investor can invest is capped at 5-10 percent of your income. Thanks for information!
Nice post reg. crowdfunding, where crowdfunding can be a good way to earn some fund to establish one foothold but at the same time there can be fear of losses arising due to volatile market, where sometimes payback to the crowd becomes difficult.
I've just graduated from banking academy, this topic was so useful
Crowd funding... I had not heard of this type of funding before.. thanks for your information.
Many thanks for your article. It is very interessting!
Existing crowdfunding sites are probably your best option when it comes to raising funds. If you want to set up your own crowdfunding portal, you’ll need to get SEC approval.
Crowdfunding was suppose to be the end all for small businesses that did not qualify for any other outside financing. But, the SEC is sitting on its hand and it does not look like those final rules will come out this year (maybe not even next year). Thus, crowdfunding for anything other then very specific projects is unlikely as a business financing option. Several comments here stated that they have helped other with their campaigns which is great - but, can you shed more light on these campaigns? Were they for specific projects (business or otherwise) or were they for the business in general (like working capital)? This might help others who may think that crowdfunding works one way when it does not (saving them time and effort). Great post about what you should / could be doing to prepare your business now for crowdfunding down the road or for any type of financing for that matter. And, several great points made here - like creating buzz about your business and its offerings. Even if you won't seek crowdfunding, creating buzz about your business is the only sure fire way to grow that business.
Anyone following crowdfunding: This years big must-attend conference is in Orlando on August 8th and9th for more info visit events.This post was edited to remove a link. Please review our Community Best Practices for more information about how best to participate in our online discussions. Thank you.
I have worked with many businesses to launch crowd funding campaigns. All of the small business that have completed successful campaigns had strong social media strategies in place prior or developed a strong marketing and social media strategy. I have seen several business owners frustrated by crowd funding because they post a campaign on a crowd funding website and take no further action. They rarely see any results. Just like marketing and sales in general you have to actively reach out to people, have a targeted compelling message and create systems that ensure all of your crowd funding marketing benefits your overall business not just this one time campaign.

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