What’s with all the buzz about crowd funding, does it work and if so how can you tap into this cash to fuel your new business idea?
The “Jumpstart Our Startups Act”
In April the president signed in the JOBS Act enabling entrepreneurs and small businesses to solicit the public for investment in their companies. This means being able to skip over all of the hoops and headaches it has taken to get small business loans, file with the SEC or attract large venture capital firms in the past and get funds to launch and grow a new business quickly.
However, some have put this move down to Obama yet again trying to take credit for what innovative entrepreneurs have already created and enabling the government to cash in on it to cover poorly spent tax payer funds and abusive spending by government employees as recently highlighted in the news. After all peer to peer lending platforms have been around on the web since at least 2005 and private lending has existed in the real estate sector for decades.
However, this new legislation does mean a new breed of crowdfunding sites and a large increase in popularity of investing in this manner. Although exactly what new regulations will evolve into will have to wait to be seen when the Securities and Exchange Commission (SEC) hammers out the details of guidelines and requirements later this year.
How Crowdfunding Works
There are actually several different variations of crowd funding to pick from.
- Equity Based Crowdfunding in which those with capital actually take part ownership in the business and
- Donation Based Crowdfunding in which money is given without any stake taken and private lending which means funds must be re-paid but no ownership or control is given up. All have their pros and cons.
Today’s crowdfunding sites allow individuals to post their ideas and funding requests and then pool money from individuals who commit smaller sums which limits their risk, to enable new businesses to get off the ground, develop new products or expand. Depending on the platform each investor can put in a minimum of as little as $1 to $3,000 and projects being funded range from those requesting a few hundred dollars to hundreds of thousands.
The Advantages of Crowdfunding for Entrepreneurs
There are many reasons for entrepreneurs to embrace and go after crowdfunding. Besides avoiding the hassles of getting a bank loan it means rapid funding to get launched while the idea is hot, flexibility in borrowing or accepting investment, being able to scale quickly and the ability to gain massive visibility in just a few days.
However, perhaps even more importantly for some it means saving relationships by not having to beg and borrow from friends and family or tap personal savings and credit cards, plus being able to really give the concept or product the chance to achieve its full potential.
Popular Crowdfunding Platforms Incude:
Crowdfunding Really Works
Recent crowd funded campaigns include:
- Creating Origami raised $16,741 for a new book and hit 100% funding in just 6 hours
- Seth Godin raised 718% funding ($287,342) on Kickstarter
- A hot sauce recipe received $24,696 to go in to production
- An idea for developing a nano-satelite for individuals to tweet and take pictures from space bagged $25,250 in just 2 weeks
Next we reveal the risks, bust the myths and review tips from those who have already been successful at raising funding from the crowd…stay tuned for Part 2 of “How to Get Money from Crowdfunding”…