We’re discussing the financing of your business. This is when you need a cash infusion to expand your business. Make sure to catch up on these posts:
- Reasons for financing a business
- Financing with organic growth
- Financing with a personal investment
- Financing with bank loans and/or credit
- Financing with outside investment
What is crowdfunding?
Crowdfunding can be used to finance your business or project. A business or individual pitches a need for funding. The general public (usually social media friends, family, fans, followers, etc) funds the need, dollar by dollar.
The financiers may receive something in exchange for their money or just a good feeling in their heart. Being that amounts vary widely (from $5-$10000) financiers feel that they can contribute to someone’s entrepreneurial dream with whatever amount they feel comfortable giving.
The following are a few crowdfunding sites:
- Rockethub – investments are considered to be donations to a project
- Kickstarter – funds are used for launching projects; investors receive something (a gift) in exchange for money
- Kiva – people lend money to individuals living in poverty as a means to enable them to earn money through a small project or business
- Indiegogo – campaigns (entrepreneurial, philanthropic, and personal) are funded by donations
- ArtistShare – connects creative artists with fans in order to share the creative process and fund the creation of new artistic works
(Speaking from experience as an investor in a few kickstarter and kiva projects, I see my investment as a little gift/donation to another fellow entrepreneur. It’s low pressure and fun to give.)
Pros of Crowdfunding:
- Can raise cash, little by little, from a huge sea of people (as opposed to trying to get lots of money from few individuals)
- Because the project/business sources from a crowd of people (and not just a handful of family and friends) there is less risk to the individual investors and less risk to the relationship. (If the film I donated $20 doesn’t get made/sold/distributed, I won’t be sore with my friend. I would be sore if I hand invested $10,000 and didn’t see a return.)
- People can donate however much they feel comfortable doing/losing. This doesn’t put your friend/family in an awkward situation where they feel they can’t (or don’t want to) contribute more to your dream.
Cons of Crowdfuding
- If your project isn’t funded 100%, you may not get any of the funds (depending on the rules of the funding site).
- You may have an obligation to provide something in return for funds received (depending on the rules of the funding site). If you don’t follow through on your project, you may need to pay your investors back.
- The US Government and the SEC are still trying to define the rules of crowdfunding. This financing source could be seeing a lot more regulation in the upcoming years in order to protect investors.
Who is crowdfunding good for?
Crowdfunding is great for people who have a new project or something innovative they want to brig to market. (Check out the pre-facebook Instagram company’s kickstarter video for the Instaprint. And, make note of the disclaimer they make to their investors that their project has changed since funding (which was prior to facebook’s acquisition of Instagram).)
The projects that do well with crowdfunding are the ones that are truly different, inspiration, fun – OR – they have a huge network of followers/fans.
What are your thoughts on crowdfunding? Have you ever had success funding a project with one of the funding sites mentioned here?