Crowdfunding is an exciting alternative for small businesses owners who need or want to raise money. But it’s not “easy money,” and it’s not a good idea for every business.
How can you tell whether or not your business has the potential to crowdfund successfully? Here are a few questions to ask yourself.
How much money do I need to raise?
SEC guidelines indicate that you can only raise $1 million per year or less through crowdfunding. So if you need to raise more than $1 million then you’ve already priced yourself out of the crowdfunding market.
You should also be aware that every crowdfunding portal, by law, uses an “all or nothing” model. If you need to raise $1 million you might still be better off looking for other ways to raise money before you turn to the crowd. If you can’t raise the full $1 million you don’t get a dime, which means you could put a lot of time and money into your business without seeing a reward.
You also need to ask how much money you already have. Crowdfunders are like any other type of investor. They like to see skin in the game. Entrepreneur.com reports that you should have at least 30% of your money raised before you try to seek funds from the crowd. Crowdfunding cannot save you from having to do a bit of bootstrapping, hustling, and risk taking. These things are elements of any successful venture.
What’s my story?
Crowdfunding is at its most successful when you have a compelling story to tell. A Fast Company article featuring Kiva’s Co-Founder stressed this element of the crowdfunding phenomenon.
Stories take us on a journey, they teach us, they draw us in, move us, inspire us—often so much so that we feel driven to act. My favorite platforms have made this an art form, and have designed their products in a way that empowers every user to share their own story in the process, too. Not surprisingly, the crowdfunding initiatives centered around the importance of story are also the ones that have inspired the most people to contribute their funds and participate, to coauthor the next chapter of a story.
Investors do not just contribute because the numbers look good. They do not make decisions solely based on financial motivations. They act when they are moved to act, and a compelling story about the origins, progress, and future of an entrepreneurial endeavor is one of the most powerful tools that I know of to inspire people to get involved.
Ask yourself whether you are doing something innovative, exciting, and powerful. Nobody’s going to crowdfund a standard drive-through carwash or Laundromat, for example. Note that there’s still a place for both of those types of businesses, and that place is important. They’re just not good candidates for crowdfunding (unless, of course, you’re doing something new, like creating the first 100% solar Laundromat stocked with high-efficiency washers).
What kinds of rewards am I offering?
Great rewards and varying levels of commitment are two cornerstones of every good crowdfunding campaign.
Rewards can be creative. Some successful crowdfunders have started with handwritten thank you notes, for example, and worked their way up from there. However, you have to factor those kinds of rewards into your crowdfunding budget, which raises the bar for the amount of income that you’ll need to generate.
If you don’t have good rewards, however, you’re left with equity. Are you really ready to sell off little bits of your company to multiple investors? This is like taking on hundreds of little bosses, each one with a stake in how your new company is run. That means losing a measure of your independence. It also means that you could chase off bigger investors later, a point made by Fox Business. This can be a problem if your company experiences truly rapid growth later.
Companies that issue shares through crowdsourcing ultimately are beholden to large numbers of unsophisticated investors who own tiny stakes in the business. This structure could deter venture capitalists or angel investors leery of investing in a firm that is owned by thousands of inexperienced shareholders.
[Furthermore]…if an entrepreneur raises $1 million or more through equity crowdfunding, he or she cannot look for additional for one year. Otherwise, the business owner must comply with securities registration requirements. What happens if the company experiences rapid growth and needs more money?
Of course, some of the same pitfalls exist when you reach out to venture capitalists and angel investors. Whenever you ask other people for money you lose some measure of control. The bottom line? Unless you’re handing out t-shirts and thank you notes it’s best to be cautious before reaching to others. And unless those t-shirts and thank you notes are compelling, your project will not succeed.
Are you truly ready for this?
Entrepreneurs who go through all of the blood, sweat, and tears of building a business from the ground up, without reaching for help, are usually positioned to handle the demands of their business at every size. They are accountable only to themselves and have demonstrated that they can meet all of their commitments.
When you crowdfund, you become accountable to hundreds of people. You can be sued for fraud if you don’t deliver as promised. You have to be transparent and share your progress and your financials publically, at every step of the way. If you aren’t 100% sure that you can deliver as promised then you’re asking for trouble. It’s not easy money…it’s a big contract with a lot of participants, with real consequences for letting others down.
Logan Chierotti is an experienced entrepreneur and executive specializing in Internet marketing, sales, branding and business operations. Logan has over 10 years experience in online marketing and is a passionate entrepreneur that a track record of creating successful companies