Business launch can be aided by crowdfunding

Have a great idea for a new product? Maybe you figured out how to make a cheaper phone or tastier pizza or even a better mousetrap. Perhaps you have a new service in mind that you are sure everyone is going to want to buy.

There are a lot of things you need to pull together before you start - a business plan, customer analysis, production and capacity contingencies - and don’t forget money.  You are going to need some money. 

Often traditional funding institutions aren’t as excited as a new entrepreneur is about that great idea. So many entrepreneurs are shifting the task of raising capital into their own hands by utilizing crowdfunding. 

Crowdfunding involves raising funds directly from a large number of people - friends, family and strangers - then using the money to launch your business. The internet is the preferred means for contacting the potential funding sources and telling them about your new project.

If you think this must just be for small players or is a passing fad, think again. According to the 2015 Crowdfunding Industry Report prepared by Crowdsourcing.org, a professional industry organization serving crowdsourcing and crowdfunding entities, crowdfunding “experienced accelerated growth in 2013, expanding by 167 percent to reach $16.2 billion raised, up from $6.1 billion in 2013.  In 2015 the industry is set to more than double once again.”

Crowdfunding can be structured in different ways. The vast majority - over 68 percent - is debt based, in other words, receiving a loan that you have to repay. But crowdfunding can also be reward-based with investors not expecting to be repaid directly but instead opting to be the first to receive your new product or service.

In 2012 the passage of the Jumpstart our Business Startups (JOBS) Act opened the door for equity participation allowing crowdfunders to become shareholders in your company.

You need to consider all your options before jumping on the crowdfunding bandwagon.  If your project doesn’t attract investors or customers, it is unlikely that you can later turn to traditional funding sources.  Banks and venture capitalist (VC) will be leery of the marketability of your great idea if crowdfunding fails.

On the plus side, if you attract a lot of interest with early crowdfunding, it will serve as validation of your idea when you need more capital from a bank or VC.

Reward based crowdfunding may sound like the best option. You get to keep all the equity in your company and the crowd funders share the risk. Crowdfunding can have tax implications. You are receiving income that may be taxable. Laws vary state by state so do your homework before starting out and taking any money.

The Small Business Development Center (SBDC) cautions that “no one like to be the first to a party.” Contributors will be hesitant to commit their dollars until you have reached about 30 percent of your stated goal. That means finding other sources up front - friends, family and selling the second car may all be part of the funding plan.

Don’t confuse crowdfunding with pennies from heaven. It is hard work. Don’t expect to do this in your spare time. You are introducing your idea to your future funders, customers, and competitors. Crowdfunding is a full-time commitment.

With the right plan and preparation, crowdfunding just may be the answer to funding your dream.