Entrepreneurs looking to start their own businesses now have more options than ever before when it comes to financing their ventures. A traditional loan (from a bank or family and friends) or bootstrapping the business yourself are still viable ways to get started. But there’s also a new kid on the block who goes by the name “crowdfunding.”
What exactly is crowdfunding?
Crowdfunding, or crowdsourcing, is a way of raising money from lots of people at once who learn about your business idea online. People pledge money in support of the company or product with the promise of perks or free stuff in return (like fan merch or the actual product, when it finally hits the market). In some cases, investors receive unlisted company shares for their pledged dollars.
Sounds like a great solution! Are there any downsides?
There are a lot of benefits to crowdfunding your startup. The cost and barrier to entry are relatively low, with crowdfunding websites listing all sorts of weird and wacky projects. When used properly, these sites can offer you high visibility before you even go to market and give you an opportunity to interact directly with potential customers who have feedback or questions.
But crowdfunding isn’t for everyone, and there are some risks. By going public with your idea before you have any intellectual property protection, someone could potentially steal your concept and go to market faster than you. You also need to be able to effectively manage questions and critiques without them damaging your brand’s reputation.
Crowdfunding comes with a hefty responsibility, since you must be able to fulfill the project and satisfy your backers. There are many stories of infant companies who have crowdfunded an idea only to discover that it will take much more time or money to build the product. This could leave you with hundreds of angry pledgers wondering what you’re doing with their hard-earned cash.
I understand the risks and I think crowdfunding is the way to go. How do I get started?
Before you go public on a crowdfunding site, make sure you have a detailed business plan. Not only will this help convince backers you’re serious, it will allow you to prepare for the future and understand what kind of investment it will take to go forward. Consider developing branding, sketching out a prototype, or filming a brief video that quickly gets your ideas across.
Once you’re ready to publish a page on a crowdfunding site like Kickstarter, Indiegogo, or GoFundMe, do some homework on which platform is right for you. Each one has its own limitations when it comes to the location of backers and ability to reach them. Make sure you read the fine print when it comes to the fees, too. Even if your crowdfunding attempt fails, these sites will take a cut of your pledges.
Most importantly, surround yourself with advisors and a team who can walk with you through the entire process. Put your best foot forward and who knows — you might just end up the next big crowdfunding success story!