07 Oct Exploring Crowdfunding Options for Your Business
Most entrepreneurs will secure funding for their new startups from a variety of sources. If you are among them, you may have heard about crowdfunding (sometimes referred to as crowdsourcing) and wondered if it could provide any opportunities for your business or new venture.
Before you set out to evaluate whether or not crowdfunding could be a part of your funding portfolio, it is important to understand that not all crowdfunding works the same way. For example, some crowdfunding is done entirely through donors. Under this model, which is popular with political campaigns, social causes and nonprofits, those willing to put up money aren’t doing so to make a return on their investment.
Instead, these participants are willing to make contributions simply because they want to improve the chances of the cause or project succeeding. Other than a possible tax deduction, depending on the recipient organization, those putting up funds expect nothing in return. This particular type of crowdfunding is unlikely to be helpful to you in launching your business.
However, there are other crowdfunding models that may provide more viable options for you as an entrepreneur, depending on what needs you have identified and what terms are agreeable to you. Although you may not have to develop anything as detailed as a conventional bank loan application, you can still expect to be asked for much of the information you should already have in a good business plan.
Here are some crowdfunding models you may want to investigate further:
Perks-based Model. In exchange for their financial support, investors under this model are offered a specific perk or reward as their only return. Typically this perk comes by way of a product related to the business venture being financed or a discount on services provided by the new business.
Peer-to-Peer Lending Model. This crowdfunding model may be the one most familiar to you. Investors make small incremental loans to entrepreneurs. Entrepreneurs are expected to repay the loans, plus interest. While the process somewhat mirrors conventional bank financing, business owners often find they can secure lower interest rates and skip the hassle of completing bank loan applications. While this type of crowdfunding has typically targeted brick-and-mortar businesses with a year or more of operations under their belt, there still may be opportunities for others, including web-based startups.
Revenue Share Model. Under this scenario, investors receive a percentage of revenue from the business venture once it is generating capital in exchange for upfront funding to get the venture off the ground. The key is to find agreeable terms regarding the revenue share. Also, watch for variations on this model that may have you giving up project ownership.
Equity investment. This is the newest type of crowdfunding and enables entrepreneurs to garner micro-investments. However, this model is still in its infancy and still has some bugs to work out. Title II of the JOBS (Jumpstart Our Business) Act enabled startups to attract crowdfunding equity investment. Startups and small businesses can now solicit investors publicly as long as they register with the SEC and disclose details of the solicitation. However, the SEC has yet to create the necessary rules and framework. Current SEC rules only allow entrepreneurs to advertise for investments from accredited investors.
Keep in mind that selling equity via crowdfunding allows a group of strangers to have the same rights of any other shareholder, including the ability to bring a lawsuit against management, among other legal rights. You may want to consider selling bonds instead, which frees you from fiduciary duties and risk of personal liability.