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Finance & Accounting, Small Business Loans

Should You Use Crowd Funding to Raise Capital?

If you read the recent story about Zack Danger Brown who launched a Kickstarter campaign to make a bowl of potato salad, it may have crossed your mind to consider crowd sourcing for your venture. Hey, if he can raise $50,000 for mixing some potatoes, mayonnaise, and hard boiled eggs, shouldn’t you be able to get some much needed capital for your legitimate business?

One of the most challenging aspect for any business is to acquire enough capital to fund a launch and sustain growth. A bank loan is usually the first option that comes to mind. However, banks typically don’t want to work with small businesses unless there is established cash flow or significant collateral to borrow against. There’s also the hassle and time involved with applying for a business loan. It can take weeks or even months to get an approval.

Angel investment is another option. Who doesn’t want a generous investor with deep pockets? But angel investment often comes with significant strings attached that need to be carefully evaluated. Most want to take a key role in business planning and expect to receive a substantial return on the money they invest. If you’re not ready or willing to relinquish some power, you better find another option.

 

A New Source of Capital with Very Old Roots
Whether you’re just in the idea stage of your business or have already achieved considerable success, crowd funding may be an option worth considering. Crowd funding is revolutionizing how many new and existing businesses bank roll their success. In the last three years, crowd funding has tripled in numbers.

What exactly is crowd funding? It’s a way to raise capital over the Internet from people who want to support what you’re trying to do. While today’s online crowd funding is less than 10 years old, the concept has roots that date back as far as “Praenumeration,” a subscription business model to finance book printing that was used more than 400 years ago.

Some of the earliest users of online crowd funding sites were non-profit organizations that saw the opportunity in fundraising via the Internet to support their charitable causes. However, this quickly branched out to for profit businesses as a way to raise capital quickly without having to deal with the bureaucracy of traditional lending institutions. Many businesses also use crowd funding for proof of concept, test marketing, and to even take pre-orders on products from customers.

 

A Few Statistics on Crowd Funding

  • The average campaign generates approximately $7,000 and lasts around nine weeks.
  • Campaigns that generate 30 percent of their goal within the first week are more likely to succeed.
  • The most common age group of those who invest in a crowd funding campaign is 24-35.
  • Men are more likely to invest than women.
  • Those earning more than $100,000 annually are most likely to invest through crowd funding.
  • Social media is one of the most important factors in attaining success from crowd funding.

 

Where to Begin
Of course, crowd funding isn’t as simple as going online and asking for money. You need to be able to generate significant exposure for what you’re trying to achieve. Fortunately, there are a number of platforms that enable you to do this. Some of the most popular are KickStarter, IndieGoGo, Fundable, and Peerbackers. They all enable you to leverage the power of their crowds to fuel your growth. These sites take a portion of the money you raise if your campaign is successfully funded.

Currently, the SEC is in the process of approving a portion of the 2011 Jobs Act, which allows micro investors to purchase shares of a business instead of just receiving gifts for their investment. This will most likely increase the popularity of crowd funding even more. Currently, businesses can only offer gifts or contributions to investors.

Before you jump into the crowd funding game, it’s vital to closely evaluate your current needs and goals so that you can develop a clear idea of what you want to accomplish. This will not only help you determine which crowd funding platform to use but it will also help you write and create the components of your campaign. Once you’ve done this preliminary work and you believe crowd sourcing is right for your business, it’s time to create your campaign. Here are some tips to get started:
Keep It Simple and Very Clear
Potential investors are not going to give away their money to unknown sources or want to support a concept or business they can’t understand. As succinctly as possible, explain your business or idea and how money invested will be used for it. You will also need to detail what you’ll do once your goal is achieved. Investors want to be part of something bigger than just themselves. Make them feel included and valued, and give them something of significance to show your appreciation.

Be an Original 
There are now thousands of businesses out there vying to get funds via crowd funding sites. What makes what you do special or unique? To achieve success, you will need to stand out. This starts with a great idea that is written in a compelling way. Add to this a catchy slogan, vibrant colors, a unique presentation, images, videos, and more to catch the eye and increase traffic to your campaign.

Be Respectful of Potential Investors’ Time
Who wants to sit and watch a detailed, rambling video about what you do? Nobody! Instead, make a short (3 to 5 minute) video that explains your concept, keeping in mind that people are browsing many campaigns and will not want to wait until the end to figure out what you’re all about. Editing software should be your friend, so scale down your pitch until it is in its most clear, concise form.

Be Authentic
A crowd funding campaign is not the place to showcase a buttoned-up corporate identity. Investors want to meet the faces behind a business. They respond to campaigns that show real life challenges and successes.

Show Success Stories
Do you have a story of how you have overcome adversity to get where you are?  Do you have customers that are already successfully using your product or service? A crowd funding campaign is the place to boast about your big wins. If you’ve achieved success with a previous venture or are already making great strides in this new business, get it out there for everyone to see.

Nurture Your Existing Online Community
While sites like KickStarter enable you to reach new audiences, it’s important to reach for the low hanging fruit of your own connections. Are you part of an industry community? Do you have a large group of Facebook friends or LinkedIn connections? You just may be surprised how much those who know you want to contribute to your success.

Budget a Lot of Time
One of the most common reasons why a campaign fails is lack of time devoted to it. Crowd funding requires you to be steadfastly focused throughout the duration of a campaign. There will be a lot of preliminary preparation along with daily promotion and management once it’s rolling. It can become a 24/7 endeavor, but the rewards can be substantial.

Be Passionate
Finally, it’s your passion for what you’re doing that will get other people to want to jump on board. This passion should jump out throughout every aspect of your campaign. People naturally want to be part of the next great thing. If you have that, get it out there and get others as excited about it as you are!

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