Over the last twenty years, the internet has changed the way we do almost everything; so why should fundraising be an exception? Crowdfunding, as it’s known, is a term that describes a group of people coming together online to financially support everything from artistic ventures to fully-realized opportunities by entrepreneurs or businesses.
The concept is pretty simple: the person or group seeking investments sets up an online profile on crowdfunding websites such as Kickstarter, Indegogo or AngelList and then describes—in detail—the opportunity they’re soliciting funds for. At this point, anyone with internet access becomes a prospective investor.
While the process of raising small investments from a large number of investors isn’t new, crowdfunding differs from traditional models of financing because it has a strong social networking component built into it.
Crowdfunding can essentially be broken down into four models:
Donation model—investors make a financial donation without receiving any tangible returns
Reward model—investors make a donation in return for some sort of reward (either tangible or intangible)
Pre-purchase model—wherein the financial contribution is essentially a pre-purchase of the person/business’s product
Equity model—investors receive an interest in the profits of the business they are helping to fund
In early April, President Obama signed the JOBS Act (an acronym for “Jumpstart Our Business Startups”) into law, a bill designed to help revive the nation’s economy and improve the unemployment situation. One part of this act worth noting is that it allows companies to raise funds by offering stocks or bonds to the general public. So, rather than donating, people are now allowed to invest in the companies they like. Crowdfunding has always been a way of raising money, but what this act does is allow business owners and entrepreneurs to raise up to $1 million from individual investors online and allow those investors to receive actual equity for their investment.
Taking advantage of crowdfunding’s benefits…
If someone sees enough in your product or service to invest in it before it is released, then there is clearly a demand for it. On the other hand, if there’s a lack of financial commitment prior to its release, then perhaps the demand isn’t what you had anticipated or your marketing message is off target. Regardless, this type of market research is an invaluable tool at such an early part of the process.
Crowdfunding also helps you create a built-in customer base. If people are willing to invest in your product or service once, chances are they’d be interested in doing it again. With a built-in customer base you also get word of mouth marketing. If the product or service you’re providing is good, your customers will tell people about it. And in the world of social media, where word spreads quickly, you can never have too much word of mouth. Similarly, these same customers could provide you with case studies and testimonials, enabling you to influence more customers to buy from you.
…and avoiding its risks
While the JOBS act is designed to help young companies grow and create jobs, it also opens the door to an increase in scams and risks for investors. In fact, the National Crowdfunding Association is already working with the SEC and other departments to ensure that crowdfunding doesn’t become a launch pad for scam artists.
It’s because of these potential scam artists that the crowdfunding model might eventually be tarnished to the point where investors will shy away from this method of investing. The best way to set investor’s minds at ease is to validate your product or service with as much up-front information as possible.
The JOBS act includes a set of investor protections—including the business plan, potential conflicts of interest, and current financial condition—but it will take some time for these provisions to be put into place.
Few investments are without risk, but crowdfunding can provide your business with much more than just financial funding. The possibilities of public online investing can ultimately lead to your company’s success.
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