If you are an entrepreneur with your ear to ground, a businessperson looking to expand your business, or someone thinking up a new idea, there is a one term or concept that you have inevitably head about. Crowdfunding, in its various forms, has become almost as frequently discussed and mentioned as the word "disruptor" or "disruptive innovation," or the "Uber of" some industry.
It has become such a market force that the SEC now has regulations specifically for crowdfunding. This conversation and topic has quickly moved to the big time.
One question that often goes unanswered, even with the increased regulatory and media coverage, is what entrepreneurs and businesses should look out for when considering crowdfunding options. Not knowing what you are doing can quickly become a serious problem for tax, regulatory, investor, and product reasons, not to mention putting you in a situation that can do long term damage to your reputation.
I always advise to consult with your financial advisor before raising capital from external investors, including crowdfunding for your newest project.
That said, crowdfunding is a great tool -- it is a powerful and innovative way to build buzz for your business and raise capital. But, like other tools, you have to know what you are doing in order to get the most out of it, and there are a few things you should know before diving into the crowdfunding pool.
1. Remember it's a business
Crowdfunding might seem like the Uber for raising investor capital and contributions, but make sure to do your homework on both the platform and the terms that come with it. Make sure you choose a crowdfunding platform that is regulated, and that you read the fine print. Raising capital always comes with risk, but doubling down on the details will help you minimize yours.
2. Perfect your pitch
As discussed above, and as I am sure you are well aware, there are literally thousands of companies and entrepreneurs seeking to raise money on crowdfunding platforms. Make sure that your story is compelling, well thought out, and that you have identified what makes your different, more sophisticated, or however else you want to differentiate yourself from the competition.
3. Use social media
As an entrepreneur, you surely know the benefits and upside to using social media to market your business, so why not use it to attract more investors to your crowdfunding campaign? Most crowdfunding platforms have active campaigns and a large social media presence -- why not leverage that to get your word out?
4. Don't come empty-handed
No one wants to show up to a party empty-handed, and the same principle applies to your crowdfunding campaign. You don't have to launch your campaign with everything finalized all the way through, but you should have already raised some funding or developed a working production model for prototype products.
5. Know your goals
Depending on the goals of your business, what you are looking to raise capital for, and what you ultimately intend to do with this funding, there are different options that will work for you. This flowchart outlines some of the options available to you in the marketplace.
6. What makes you different?
Building on the previous point, when you are raising capital from potential investors and backers, you must figure out what you are going to be giving them in return. What perk or benefit will they get from backing your crowdfunding campaign? Sample products, input on design options, or early access to the product before it goes live are just a few of the options available to you.
Crowdfunding is hot right now, and it is nearly impossible to be an entrepreneur without a slew of opinions and advice coming your way telling you how to best make use of it. That said, it is important to remember is that crowdfunding is a business tool like any other, and depending on the platform you end up using there will be different rules that apply. As always, and good advice whenever receiving external capital, be sure to work with your CPA or tax advisor to make sure you are in compliance with applicable regulatory and filing requirements.