Need Small-Business Capital? Try Crowdfunding

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Once upon a time, not so long ago, raising small business capital meant courting venture capitalists and angel investors one-on-one over a period of several months. But now, thanks to the Jumpstart Our Business Startups Act of 2012, small-business owners can raise the capital they need to cover startup costs, expansion, or product development through crowdfunding. It’s the first time in 80 years that privately-held companies have been allowed to publicly advertise for investment funds although the rules apply on a state by state basis.

2015-06-18 at 10.18 PMEven if you’re new to crowdfunding, you may be aware that crowdfunding sites allow entrepreneurs to pitch their business and product ideas to the public and collect funds from thousands of everyday people. In return for their contributions, most entrepreneurs offer crowdfunders a reward of some sort, ranging from a branded gift item to one or more shares of company stock. Know what your options are, how to encourage contributions, how much to expect from the average contributor, and what to do once you’ve got the money.

Prepare for Your Crowdfunding Venture

Before you begin your crowdfunding campaign, it’s a good idea to be prepared. If you haven’t done so yet, the United States Small Business Administration recommends incorporating your small business, preferably as a C corporation. If you’ve already incorporated your business, check with your own lawyer to find out whether your company will be allowed to crowd-fund under the JOBS Act in your state.

Make sure you’re prepared for the accounting and tax ramifications of a crowdfunding venture. If you raise between $100,000 and $499,000, an independent public accountant will need to look over your financial statements. If you raise more than $500,000, you’ll need to have those statements audited.

Before you launch a crowdfunding campaign, you’ll need to be prepared for the level of commitment it will require. The average contributor to a crowdfunding campaign contributes about $25; at that rate, you’ll need to potentially reach hundreds or thousands
of investors, depending on how much you hope to rake in. Make sure you have promotional resources in place, including staff members who can take calls, respond to emails, or connect with contributors and potential contributors via email or social media.

Know Your Options

There are two basic types of crowdfunding platforms available to small-business owners and entrepreneurs. Rewards-based platforms like Indiegogo and Kickstarter work by offering contributors a free sample of the product or some other gift in return for their contributions. To make these work, come up with some rewards that will truly entice contributors — one way to do this is to take a look at some of the rewards offered by successful campaigns on platforms like Kickstarter and emulate them.

Another option is equity crowdfunding. Platforms like Circle Up or Crowdfunder allow entrepreneurs to turn to the Internet to raise investors, offering shares of stock in return. The principal is the same as traditional investing — contributors pledge a minimum amount and receive a certain share of company stock. The difference is that you’re allowed to publicly advertise your requirements on the Internet, where you might get in touch with investors who would have never heard of you otherwise.

Be Honest and Detailed

2015-06-18 at 10.26 PMDevelop a simple pitch that allows you to connect with your target demographic. Be honest about your plans for the money, and give as much detail as you can about those plans. Even regular people on rewards-based crowdfunding websites won’t part with their hard-earned money unless you can convince them that your project is worthwhile and that you won’t waste the crowdfunded money on frivolous expenses.

Once you close your crowdfunding campaign, you can take advantage of cost-cutting options like free online estimate templates to reserve as much of the money as possible for start-up, expansion, or other business costs.

As you execute your crowdfunding campaign, it’s important to treat your investors with respect. If you promise specific rewards, make sure to deliver them in a timely fashion. Post regular updates to your campaign website to keep everyone informed. Don’t exaggerate about your progress, credentials, or company history. Many potential contributors are savvy enough to discover exaggerations and, in any case, it’s not smart to misrepresent your project or abilities.

Crowdfunding is a great way to raise money for small business capital, and thanks to the JOBS Act of 2012, it’s now a potential option for small business owners. Through crowdfunding sites, you’ll be able to reach a much wider pool of potential investors than you otherwise would. You never know — your campaign might really take off, allowing you to achieve a level of success beyond your wildest aspirations.

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