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Is Crowdfunding Right for Small Businesses?

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Crowdfunding, also known as crowdsourcing, is an innovative way to raise seed money with simply a great idea. You can get your small business off the ground, without the annoyance of credit applications or stockholders. Skeptics claim that crowdfunding is a dying trend, but ventures continue to raise huge amounts in a short period of time. For example, Mashable reports on an indie game developer who recently raised over $1 million in a single day. While crowdfunding sounds like an ideal way to fundraise, small business owners should always be wary of get rich quick schemes. To help you decide whether this is the right path for your business, here is a guide to the ins and outs of crowdfunding:

Crowdfunding Basics

Crowdfunding is exactly what it sounds like: funding by crowds. While business ventures have been traditionally funded by personal funds, friends and family or banks, crowdfunding allows you to seek capital from people who like your idea. You can basically consider crowdfunding as a business presentation to a huge board of potential donors, composed entirely of the public. You set a goal amount that you must meet before starting your project. If people want to see your project completed, they will pledge money and contribute to your pool, usually in return for a small reward. Once you have reached 100% of your requested funding within a certain amount of time, the pledges will have to be fulfilled. If your campaign ends before you earn enough money, you will not receive any funding. In fact, while more than half of projects with one pledge succeeded, 21% of projects receive no funding at all, according to Intuit. In addition to small businesses, crowdfunding can be used to raise money for a variety of missions including disaster relief, arts and political campaigns.

Crowdfunding Advantages
Crowdfunding can be a great alternative to banks, which have been clutching onto capital since the economic downturn. Your business will be funded by potential customers, so you have established a personal relationship and customer participation from the get-go. In a New York Times article on crowdfunding, Yancy Strickler, co-founder of the popular site Kickstarter, describes how customers feel about pledging: “You’re not just buying the thing, you’re creating it.” Small businesses can only benefit when customers have a stake in their success too. By appealing to customers directly, crowdfunding allows you to perform market research and raise funds all in one go. With crowdfunding, you truly minimize your risk when you have an explicit demand, instead of manufacturing your goods or buying supplies, then waiting to see if customers want your wares. While customers become financially and emotionally invested in your small business, you still have complete control. Unlike a board of investors, who may try to control how your business is run, the crowd is in no way entitled to control your operations. Instead, customers usually receive a token (such as a t-shirt or keychain) as a memento of their investment.

Crowdfunding Disadvantages
Not every small business wants its plans out there on the Internet. By seeking funding publicly, you leave yourself vulnerable to idea poaching. This is particularly problematic for small businesses whose larger competitors may exploit their ideas. If your small business successfully fundraises through crowdsourcing, you will have to stay very transparent about your business practices. While the donors do not necessarily have control over your production schedule, it’s best to produce your promised goods in a timely fashion. Scams have happened on crowdfunding sites, in which an entrepreneur fundraises then fails to deliver the goods. This means you will have to devise a means of sharing your progress explicitly, to avoid the stigma of fraud. In part due to issues concerning potential fraud, crowdfunding has been under fire from the Securities and Exchange Commission, reports Slate.

Popular Crowdfunding Sites
If you decide that crowdfunding is right for you, make sure you choose the right platform for your small business. Creative endeavors and inventors may find success on websites like Kickstarter, RocketHub and Pozible. If you prefer capital over creativity, check out sites like StartUp Addict, while small businesses can find local support on LuckyAnt. For a more comprehensive directory of crowdfunding websites, visit CrowdSourcing.org.

 

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