If you're considering crowdfunding to raise money for your business there's no shortage of platforms you can use. In fact, according to one report, at least 1,250 active crowdfunding platforms exist worldwide and the industry is on track to raise $34.4 billion in 2015. But it's important to carefully weigh your options before jumping into the fray, says Aaron McDaniel, CEO of equity crowdfunding deal aggregator Access, a mobile app slated to launch this summer. Here are a handful of critical things he says you need to think about before using a crowdfunding platform.
Do you want to offer rewards or equity in exchange for money?
Popular platforms such as Kickstarter or Indiegogo are well suited for consumer products because they're essentially pre-order platforms where funders contribute money to get early access to cool ideas or inventions, often at a discounted rate. For the company going after crowdfunding it means calculating how much money it needs to procure a bunch of inventory, reward its early backers and still have enough left over to get a jump start on a real business.
Software or B2B solutions may be better served by equity crowdfunding which involves selling equity in a company. "With a Kickstarter campaign it's really about making a snazzy video and a lot of social media," he says. "Whereas on the equity side it's a little bit more of a formal thing where you're actually interacting with more sophisticated investors."
Does the platform expose you to liability?
For example, if you opt for equity crowdfunding you can get in trouble for taking money from non-accredited investors, so what is the platform doing to ensure it is only connecting companies with legitimately vetted backers? To be accredited a single person must have made more than $200,000 a year for the last two years with the expectation that such income will continue, with the number bumping up to $300,000 for married couples. Alternately, anyone with a net worth of more than $1 million qualifies to be accredited.
Investor management is another potential source of liability and complexity that can distract you from running your business. How will the platform facilitate tax reporting requirements or the updates you'll need to give the investors who have a stake in your company? Be smart and choose an equity crowdfunding platform that makes a large group of investors appear as a single investor so you won't have to deal with the hassle of communicating with backers on an individual basis.
Do you need advice or connections?
If so, the wealthy backers using equity crowdfunding platforms may be able to help. Often, they're entrepreneurs themselves and depending on the crowdfunding platform can be tapped for their expertise and network.
How quickly do you need your money?
Rewards-based platforms generally have a faster turnaround. Kickstarter campaigns typically run about 30 days, for example. It's going to take longer than that with equity crowdfunding simply because of the due diligence and information sharing that needs to occur when investors are buying a piece of a company and hoping to someday see a financial return. Expect to receive funding on an equity crowdfunding platform within 45 to 60 days, McDaniel says.
How will your intellectual property be protected?
Rewards-based crowdfunding platforms often make campaigners use standard templates that involve sharing certain information. Would a required video expose too much about how your product works? Think about how much information you are comfortable sharing about your idea and know that equity crowdfunding platforms have a more in-depth due diligence process than rewards-based platforms. "Some of the better platforms even require prospective investors to sign NDAs before viewing the information you share," he says.
What will a platform charge you?
Kickstarter charges 5 percent of the total dollars a campaign raises, for example. How other platforms make money is all over the board, so make sure you understand the fee structure of any crowdfunding site you're considering.
How are you going to promote your campaign?
Crowdfunding is a noisy space so don't expect the platform you choose to magically get your project funded without you working hard to promote it. "With so many platforms out there it's hard for your deal to stand out," McDaniel says. "Platforms like Access make it easier for prospective investors to see your campaign, so it's not just another email alert they ignore."