Beware the Caveats of Crowdfunding
P. Simon Mahler
Lecturer | Consultant | Writer | Key Note Speaker | Small Business Champion | Economic Development | Social Impact Design | Course Curriculum | Inspiring Good in Others
Money on the wood is good is what I always say in business. Nearly every day, it seems, there's another "success story" about how crowdfunding--raising money from the public at large, usually the internet--has helped someone finance a movie, build a smartphone app, or create a cool new computer game. Dozens of crowdfunding sites have emerged in recent years, with Kickstarter, Indiegogo, Crowdfunder, and RocketHub among the leaders. Ok, those may be the leaders, but here are some others to take note of: GoFundMe, Crowdrise, TeeSpring, Patreon, YouCaring, Crowdrise, DonorsChoose, Kiva, and GiveForward.
Does all that attention mean that crowdfunding is a viable financing source for a new or existing small business?
Michael Evans, Managing Director of the Newport Board Group, a nationwide business strategy consulting firm, says no...at least not yet.
"Crowdfunding is an exciting and potentially significant form of financing new businesses and product development, but it is too new and still subject to regulatory restrictions to be a significant source of capital for small company," Evans says.
In hearing that, more and more sites are popping up and ideas are getting funded, if not directly, through another route. "I may not have been able to achieve my goal of $50,000 on Kickstarter, but I tweaked my video after the completion date and gained a following of 20,000 shortly thereafter that provided enough funding and business for me to grow and more," says the founder Ryan Grepper. See his campaign story here: Coolest Cooler
Studies have found that the vast majority of crowdfunding initiatives have fallen well short of their goals. Also, crowdfunding has barely passed federal financial regulators concerns about potential fraud. Currently, individuals can invest no more than $2,000 or 5 percent of his/her annual income. They must also work through an intermediary that is registered with the Security and Exchange Commission (SEC), a certification many smaller crowdfunding sites don't have. For the most updated information on crowdfunding, have a look at this: SEC Passes Crowdfunding Regs
Crowdfunding, is it for everyone?
"The first question I would ask is, what is the value of a relationship with investors," advises Len Fischer, Founder and Chairman of the Board of small business funding consultants Benetrends. "Can you benefit from their advice, direction, support, and council after the funds have been used and you are in repayment phase? Also, consider what percentage of the total funds are needed to start your business, can be secured through a crowdfunding investment, and how that measures with your long-term financial goals and business budget."
Success in crowdfunding also hinges on how good a case one can make to prospective investors. Many entrepreneurs use brief videos that may attract many viewers for their entertainment value, but raise little in the way of cash. Crowdfunding investors also expect something worthwhile in return for their investment, based on the amount contributed. Donors can be rewarded any number of ways, but the expectations of larger contributors may well exceed what you're willing and can afford to give.
This company raised a bit of money with this commercial and just sold for $1B as in $1 BILLION: Dollar Shave Club (You will laugh and want to join)
Crowdfunding is no doubt here to stay and will gain acceptance as regulatory issues are settled. "Eventually, crowdfunding will emerge as a more accepted method of funding ventures and product development, but only after other sources of capital tighten up," Evans says.
Fischer adds, "Crowdfunding is a better platform for publicity, community feedback, and promotion, or to test the idea among your peers and investors. It's not a viable option for all companies, and can be a gamble." If you are struggling in small business, in need of some capital, I suggest you look at Kabbage. Their program is amazing.
In saying all this, now the next question I get from so many is: What gives me, the person with the idea, a great chance at landing some much needed dollars to successfully launch? My response? Top Ten Crowdfunding Videos
Get Focused. Get Busy. Sprout and Grow.
P. Simon Mahler, nominated as both an 'Expert' and 'Leader' Influencer in North America for small business, currently volunteers for both the SCORE organization as part of the "Mentors to America's Small Business" and for Startup Grind Boise. Dedicated to building stronger economies in small communities and helping small businesses succeed through educational entrepreneurship, Simon is committed to the future success of each and every small business in small towns across the country. He is always available to take calls for action and is willing to mentor to any small business out there across the globe. Follow him on the journey of his next endeavor, by starting a business of your own. His daily blog of activities will be posted on LinkedIn for you to enjoy. Find him on social media and connect to get some great ideas to get your business growing!
Senior Experience Designer/Writer focused on designing interactions with Generative AI, previously technical project/program manager and senior instructional designer/developer.
8 年Some interesting and salient points here, however you have left out a.couple of very significant focuses for many crowd funding campaigns. Not all are focused on starting a small (or not so small) business or on funding the development of a product. Many campaigns are launched by non-profit or not for profit organizations. At least one that you mention, Donors Choose, is exclusively focused on charitable donations to schools and teachers with no "rewards" (as in merchandise) for the donors other than some lovely thank you letters from students. The purpose of these donor-focused campaigns is not to raise capital to grow a business to eventually profit from (by increased consumer recognition/interest or by sale of the business/product/idea) but, rather, is to raise awareness of the charitable work and provide donors with another way to contribute. I would also argue the Kiva micro loan programs have more of an altruistic focus, at least for those of us who are providing the funds for the loans. We do not expect to receive any merchandise nor do we expect to profit from our loans in any significant, material way. Most of us resend our funds again and again. The other significant focus for many of these crowd-funding sites, GoFundMe being the example that comes to mind first, is a way for individuals in need to reach out for help from relatives, friends, acquaintances, colleagues, etc. I have noticed that some people are now using these sites to try to fund business ideas, mainly (at least in the case of the people I have talked to) because Kickstarter requires that you actually hit your stated goal to get any of the money (and also because Kickstarter, Indiegogo, and probably others, require more information in their application process). Personally, as a long-time participant (as a funder and donor) in crowd funding, I only contribute to business ideas via Kickstarter, I contribute to charitable organizations via Indiegogo and a couple of others you don't mention. I occasionally help out people I know or am linked to directly in some way via GoFundMe. I help local schools and teachers via Donors Choose and I have been relending the same ~$200 via Kiva Loans since shortly after they launched Kiva. I guess what I am trying to say here is that you seem to have placed all these crowd funding sources into the same basic category when they are not the same and do not have the same (or in some cases any) entrepreneurial goals.
Speaking as someone who Kickstarted six figures-- I think you need to differentiate equity crowdfunding from rewards-based crowdfunding here. They have utterly different dynamics, and while the latter has gotten a lot harder for the average person to do (especially in gaming) it's still very viable if you've got a sizeable following and also want/need all the attention that comes with running a campaign. Rewards-based crowdfunding is great for discoverability if you have a preexisting following that can make it happen-- but you are better off trying to come up with more cash on your own or using an alternative source like Kabbage if you don't really have a following yet, because going to Kickstarter does take more resources than most people are prepared for. With that said, I do agree that equity-based crowdfunding isn't going to be as viable as rewards-based-- at least not yet. Because when you run a Kickstarter campaign, you're making an emotional appeal. Backers don't get a financial return. You simply have to give them what you promised. Making a financial appeal and complying with regulations, that would require a whole different platform and objective, and trying to appeal to 200 different angels is a whole other animal than giving a copy of the game and making the backer into a custom character.