By Jon Zacharias
In the gig economy, you can crowdsource almost anything. From formal crowdsourcing, which often involves droves of freelancers doing data, writing or design work, to informal crowdsourcing, which might involve someone asking for recommendations or information on Facebook, millions of people reach out to the other millions on a daily basis.
And you can do the same if you need funding to get your new business idea off the ground.
We’ve covered the basics of crowdfunding so you can decide if this is the right financial choice for your new business endeavor.
What Does Crowdfunding Your Startup Mean?
Crowdfunding literally means turning to a crowd of people for the startup loans you need. You could put the call out on social media (or even via mail) to 100 of your acquaintances, asking everyone to pitch in $200 to fund your startup.
Alternatively, you could use a platform such as Kickstarter to connect with thousands of people online.
How you crowdfund, and the scope of the crowd you seek, depends on your goals, your financial needs and what you have to offer your investors.
What Are the Benefits of Crowdfunding Your Business?
Crowdfunding has numerous benefits. First, you don’t need a credit history or even good credit. You don’t need a traditional business plan and all the due diligence required by banks.
In fact, all you really need is a business idea, product or service that resonates with the crowd along with the marketing chops (or access to someone who has them) to get noticed online or in the community.
The entire concept of crowdfunding is that you connect with people who are excited about your business, so they open their wallets to help fund it.
For example, if you’re trying to open a sandwich shop in an area that has no restaurants, residents might back you simply because they love the idea of convenient lunch or dinner options in the area.
The right levels of excitement and a little luck online can help you go viral with your crowdfunding campaign, putting your idea in front of potentially millions of micro-investors and consumers.
Crowdfunding can also help you access funding quickly. Depending on how you crowdfund and which platform you use, you can gain access to funds within days or weeks.
This isn’t true of every program, so you must read the fine print before you commit to any crowdfunding campaign.
What Are the Disadvantages of Crowdfunding Your Startup?
One of the biggest disadvantages of crowdfunding is what makes it so popular with the investors: You have to offer something of value in return, and then, you must follow through on those promises.
This isn’t really a disadvantage compared to other business loan options: you’re always going to have to pay something back in some way.
But with crowdfunding, you can become more locked into the agreement.
If you fund your startup with a loan or credit card, you simply have to make monetary payments according to your agreement.
How you manage your cash flow to make those payments is up to you. In crowdfunding, you may agree to provide specific products or services to investors by specific dates, which leaves you less wiggle room if things don’t go as planned.
Going through a crowdfunding platform like Kickstarter or Indiegogo may make it possible to get seen by the masses, but you’ll also likely pay for the pleasure.
Many of these platforms have fee structures, so always read the fine print so you understand what portion of your funding may go toward those expenses.
Options for Crowdfunding a Business
Crowdfunding comes in three major types: rewards, debt and equity models.
- Rewards models exchange money now for rewards later (this is the Kickstarter model). For the investors, the process works more like making a purchase, though they understand their goods may not arrive for quite some time.
- Debt models allow the crowd to fund multiple microloans based on a specific set of terms. For example, you might agree to pay a $15 return for every $100 funded within a certain amount of time. That means if someone gave $200, they would receive $230 before the agreed upon date. Debt models may also come with other agreements, such as a timeline on when the company or product will be launched; if the timeline isn’t met, you may have to pay back the funds.
- Equity models let the crowd buy a “share” in your business. Investors know they won’t receive any return unless the business sees a profit or you sell it. Equity models typically contain rules on what power investors might have and how their ownership of the business will be handled. Crowdfunding via equity isn’t the same thing as going public with a corporation, though.
How to Choose the Right Option
To choose the right option you need goals and plans. The rewards model works well if you have an interesting product idea people can get excited about and share with others.
The debt and equity models may work better for business ideas that are solid and offer a good chance of return but aren’t as exciting for the consumer.
Some crowdfunding sites you can use include:
- Kickstarter: the king of rewards-based crowdfunding; you’ll have to meet your fundraising goal before you receive funds
- Indiegogo: rewards-based crowdfunding for unique or innovative ideas
- Fundable: investors and private citizens funding business ideas
- Crowdfunder: connects entrepreneurs with equity investors
- Patreon: subscription-based crowdfunding that works for writers, artists and publishers
- RocketHub: connects venture capitalists with entrepreneurs in specific niches
The Bottom Line
Crowdfunding can be an exciting, lucrative way to fund your startup or new product idea, but these opportunities often come with a lot of fine print.
Seek tip: Take your time, understand all the requirements and ensure you can back up your promises with realities before you plunge into the crowdfunding pool.
Jonathan Zacharias is the Marketing Manager at Seek Capital. He earned his bachelor’s degree from the University of Wisconsin-Madison and his JD from California Western School of Law. Views expressed are personal.
(This article originally appeared on seekcapital.com. Re-published as part of a content partnership.)