At the height of the not-so-great recession about four years ago, my publisher approached me with an idea: What if we did a book on all of the different ways a business could find and get funding? The editor I worked with challenged me to come up with as many different funding mechanisms as I could find and the compile them into a book.
To their (and, frankly, my) surprise, I came up with almost 25 different ways to fund a business. Each chapter in Get Your Business Funded looked at a different money source, everything from the traditional – SBA loans, friends & family, savings and so on – to the creative – business plan competitions, microfinance, and factoring.
But of all of the different options I unearthed, by far the most interesting was the newest (at that time): Crowdfunding.
Today, there are two forms of crowdfunding, both providing a valuable option for small businesses. Let’s begin with the original form of crowdfunding that started with sites like Kickstarter and Indiegogo. What is cool about this form of crowdfunding (let’s call it benefit crowdfunding) is that it offers an altogether new way to fund a business.
Traditionally, using outside sources (that is, not the entrepreneur’s money or family), a business could raise the capital it needed in one of two ways:
- Debt financing: This is what it sounds like. The entrepreneur goes into debt in exchange for the money. This money must be paid back.
- Equity financing: Here, the businessperson exchanges shares of the company, his or her equity, in return for the money. He does not need to repay this money because the financier received a share of the company for their investment.
But with benefit crowdfunding, the entrepreneur doesn’t need to go into debt nor sell shares of the company for the money. Instead, he or she gives a ‘benefit’ of the business in exchange for the money.
For example: Let’s say that you are starting an ice cream shop. You could let people who invest$100 name one of the sundaes. Someone who invests $500 could have a flavor named after them. In this scenario, you still get the money, but you do not go into debt and you continue to own 100 percent of your business.
These days, there are many different crowdfunding websites, catering to all sorts of niche markets. So step one is to find the right site to launch your campaign. Step two is to come up with different levels of benefits. Step three is to make a catchy video that explains the business/project. And finally, step four is to get the word out. Crowdfunding magic happens when you involve your own network and then use them to springboard into a larger group, a.k.a., the crowd.
I have a friend who successfully crowdfunded his first album. He says that he spent three months planning his campaign for the one month he crowdfunded. That is fairly typical. Do not expect to simply throw up a video onto Kickstarter and think that scores of people will then shower you with money. That is not how it works. But if you take the time, come up with a good plan and benefits, and then network and market the heck out of it, you too can have a winning benefit crowdfunding campaign.
The second sort of crowdfunding is revolutionary in its own way, even if it does not create a whole new category like the previous method did. It is called equity crowdfunding. Given what has been said here so far, it should not come as a surprise that the idea is to raise equity capital via a crowdfunding platform, instead of the more commonplace method of going to individual investors one by one.
The problem has been that to raise equity capital through a mass offering, a company and its investors have had to jump through a lot of SEC hoops. Last year, Congress passed the JOBS Act (Jumpstart Our Business Startups), which will ease securities regulations and make it possible for small business to crowdfund using equity instead of benefits.
What is great about both of these forms of crowdfunding is that they give entrepreneurs additional tools in their funding tool chest.
These days, there really are a lot of ways to get your business funded.
Have you used crowdfunding to raise capital for your business? Share your story below.
About Steve Strauss
Steven D. Strauss is one of the world's leading experts on small business and is a lawyer, writer, and speaker. The senior small business columnist for USA Today, his Ask an Expert column is one of the most highly-syndicated business columns in the country. He is the best-selling author of 17 books, including his latest,The Small Business Bible, now out in a completely updated third edition. You can listen to his weekly podcast, Small Business Success, visit his new website TheSelfEmployed, and follow him on Twitter. © Steven D. Strauss.