Is Crowdfunding Right For You?


Crowdfunding is hot right now. It’s the main buzz word in the entrepreneurial world and rightfully so. Millions of dollars are going to companies who have a great idea. It makes entrepreneurs want to find their own idea so they can cash in with their own campaign. The financial reality of crowdfunding, however, is that it may not be right for every entrepreneur.

Crowdfunding Is As Much a Marketing Tool As It Is a Channel For Funding.

Crowdfunding campaigns effectively establish a brand identity with a core consumer demographic. This exposure does more than just reach out to potential backers. It also creates future customers. Sometimes the goal of crowdfunding campaign is to increase brand awareness more than it is to actually reach a funding goal.

Let’s Face It: you’d hire a marketer to promote your business as an entrepreneur. You’d find backers if you need capital. Crowdfunding combines these two and that can sometimes create fusion confusion.

Entrepreneurs Cannot Forget About Regulatory Compliance.

The SEC sees equity crowdfunding in the same way it sees securities. This means there are mechanisms in place to protect backers. Entrepreneurs will need to file an offering statement, follow ongoing reporting regulations, and are subject to multiple levels of review. Regulatory compliance is complex and unless an entrepreneur is also an attorney, cannot usually be navigated solo. Expect to pay for a good attorney to advise on this process.

This is why using rewards-based crowdfunding tends to be the most popular option for startup entrepreneurs. By receiving pre-orders instead of trying to sell equity, the relationship with the backer is more like having a new customer come along and that’s something familiar.

Don’t Forget About State Rules On Crowdfunding That Exist As Well.

The Federal government has rules that must be followed, but so do all 50 states and the 16 territories that make up the US. There regulations are all over the place right now. Some states require a Blue Sky review. Backers can come from anywhere, which means there is a need to file paperwork in every state. Some states and territories only allow in-state companies to crowdfund with in-state backers. Then there is Massachusetts and Montana to consider, who are suing the SEC over their rules.

Have you hired that attorney yet? Imagine the cost of having to file in 20 different states because of the backers that came your way. You’ve got to exclude foreign backers in most circumstances as well if you’re selling equity. That money you just raised may disappear before you ever get to use it to make your company grow.

Nothing Beats An In-Person Pitch And Demonstration.

You can have a slick marketing video that shows off your prototype. You can upload all of your blueprints. You can even show backers that an idea has value to it by showing that value in action on camera. None of that compares to a backer who gets to try out a prototype on a personal basis. Entrepreneurs think of crowdfunding as a short-cut to the traditional process of raising capital, but there is still something to be said about the benefits of making an in-person pitch.

For one, backers can have their questions immediately answered by an entrepreneur. There’s no waiting for the back and forth comments that happen on a crowdfunding page. Backers can write a check to you in-person that day when a presentation goes well, whereas crowdfunding might require you to wait 60-90 days to receive cash. There isn’t the 5-9% cut taken off the top with traditional in-person methods like there is with crowdfunding.

Crowdfunding Doesn’t Always Draw In Your Best Backers.

Entrepreneurs often need more than capital to make their business succeed. They need the experiences, manufacturing contacts, and distribution channels that a backer can provide as well. In crowdfunding, the only real benefit that is achieved is cash in hand. Giving up equity means an entrepreneur should receive access to the backer’s networking channels.

There’s a good chance that crowdfunding backers, even equity investors, don’t have any networking contacts whatsoever. They’re investing because they want you to grow their cash for them.

Crowdfunding is a complex platform that can be highly beneficial to certain startups. If there is infrastructure in place, experience within the executive team, and good marketers on-hand that can run a campaign full-time, then give it a shot. There’s not a whole lot to lose. For entrepreneurs with a startup that needs experience and capital, then crowdfunding could cost more than any cash that is raised.

Is crowdfunding right for you? Consider your needs and these key points and you’ll find the answer to that question.