The concept of crowdfunding isn’t waiting to hit it big – it already has. The numbers plainly tell the tale with more than 600 crowdfunding platforms around the world raising billions of dollars in the few years that it has rested high in the public consciousness. What exactly is crowdfunding? It’s exactly what the name implies; a way to raise money for almost any project by soliciting small donations from many individuals. There are a variety of ways to go about crowdfunding your business startup. Here are some of the most effective approaches for startups:

Choose a Platform

Before anything, an entrepreneur needs to decide which platform will serve him or her best. The early evolution of crowdfunding has seen different platforms adapt themselves to different types of projects from all walks of life: artists, musicians, writers, non-profit organizations and – you guessed it – small businesses. Your first step in taking advantage of crowdfunding is to assess the platform best for you. The two behemoths in the industry, Kickstarter and Indiegogo have been thoroughly vetted in the court of public opinion. They accept projects of any kind. Keep in mind, though, that you will pay a processing fee of some sort to the platform, usually between 4-8 percent of your goal amount.

Reward Funding

In order to get someone to make a donation to your startup business, you need some sort of “bribe.” Although Kickstarter and Indiegogo are considered to be great choices for creative projects, it doesn’t mean a business-minded entrepreneur should discount them. The thing to keep in mind is that Kickstarter has an all-or-none model. If you don’t hit your goal, you don’t get to keep any of the money raised; it all goes back to those who donated. Indiegogo lets you choose to keep all money raised up front, but attaches a 9 percent processing fee for that option. Your big decision with a reward funding approach is to figure out some kind of cool reward that entices people but doesn’t break your project financial planning.

Equity Funding

This is probably the preferred method of crowdfunding for those looking to innervate a startup business with a cash infusion. By offering equity in the company rather than a reward, you allow interested investors to exchange money in return for a stake in the company, just like a real IPO. Three options to pursue for equity funding are Crowdfunder, Circle Up, and The Lending Club. Let’s take a look at how each works, in turn.

  1. Crowdfunder: This platform offers a network of venture capitalists that have a track record of investing in average startups to the tune of $1.8 million. If you are a serious entrepreneur with an idea that requires more than a few thousand dollars, Crowdfunder might be a good option. Rather than charge a fee based on percentage of money raised, Crowdfunder charges a monthly subscription for the time that a project is live and raising money.
  1. Circle Up: The process here is essentially the same as with Crowdfunder. More than 200 companies have found funding through Circle Up to the tune of more than $1 million each. The average investor ponies up more than $100,000, a far cry from the $5 to $100 typical donations on Kickstarter and Indiegogo. While Circle Up charges a fee based on money raised, it doesn’t list a specific rate on the website, though does say its rates are in line with that of traditional investment bankers, which is normally in the 7-10 percent range.
  1. The Lending Club: This service claims it eliminates banking middlemen, allowing “both sides to win.” You can solicit investment funds through The Lending Club, as well as set up private loans on mutually agreeable terms.

Equity crowdfunding is in a state of flux right now. Seasoned investors probably immediately noted that it appears to be a way to bypass the intense scrutiny the SEC normally applies to startup businesses seeking venture capital. Right now, crowdfunding investors must prove they have at least $1 million in assets and more than $200,000 in annual income. These requirements winnow the field considerably.

Legislation is on the way in the form of the Jumpstart Our Business Startups Act of 2012. The SEC is still in the process of creating the specific rules that will apply to crowdfunding investors. Entrepreneurs hope the new regulations get a green light soon.

There are a few factors that successfully crowdfunded startups seem to have in common. First and foremost, you need an engaging story to tell. A professionally-produced video is a necessity. You should also prepare a serious business plan and be able to show potential investors that you have done your homework work. In short, wow them with your product or service but show them you’ve got the numbers calculated also.

By Kar

Dr. Kar works in the interface of digital transformation and data science. Professionally a professor in one of the top B-Schools of Asia and an alumni of XLRI, he has extensive experience in teaching, training, consultancy and research in reputed institutes. He is a regular contributor of Business Fundas and a frequent author in research platforms. He is widely cited as a researcher. Note: The articles authored in this blog are his personal views and does not reflect that of his affiliations.

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