From the course: Small Business Secrets

Understanding crowdfunding

From the course: Small Business Secrets

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Understanding crowdfunding

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- When it comes to finding funding for your small business there are many options. One option in particular has gained more attention recently, and I think it deserves its own discussion right now, that option is crowdfunding. Now, if you're not familiar with the term or the concept, crowdfunding is the idea that many individuals come together, perhaps from all around the world, and contribute any amount they want, as little as one dollar, toward building your business or your project. There are lots of places to participate in crowdfunding, perhaps the most popular at the moment is Kickstarter. Kickstarter is a website where people put up their projects, and then other people make donations to build the project. To date, one of the most popular crowdfunded projects is Star Citizen, a video game. Now, really you can use crowdfunding for any kind of business, but why do these people want to give you money? Well, you can entice them in a few ways, first of all you can give them some sort of reward. In other words, you give them the product earlier than everyone else, or you give them special discounts, or perhaps you give them features that no one else can get. There are other ways to do crowdfunding such as debt based crowdfunding where people give you a micro loan, and you pay them back, or even equity where you're giving them a piece of the business. Another option might be via royalties, someone makes an early contribution and they get paid a small fund over time. Now, a few cautions when it comes to crowdfunding, particularly for small business owners, when you try to get crowdfunding it's like creating a second business, I call it a pseudo business. You have to create all the products, and all the marketing, and promotional video, all of the attention that you would put into a normal business you're going to need to do that with crowdfunding, and at the end of receiving all that money you really haven't built a business, all you've done is gotten some money from other people to start the business. The other issue with crowdfunding is that sometimes you don't fall under as much scrutiny as a real investment opportunity. What that means is if you went to an angel investor and tried to get money for your business they're going to want to see your financials, and your history, and the people that you're working with. That scrutiny is actually a good thing, and so sometimes when people crowdfund a business they're missing out on the value that comes from having a third party check and double check what you're trying to build with your business. Then finally is the issue of delaying. When you try to crowdfund a business really you're just putting off the fact that you're going to need to start selling this thing. It gives you a false sense of security when you're seeing all this money coming in from lots of other people, but really you haven't finished your business, you've just started your business, and you're going to have to go out and start selling things. It's why I recommend for most small business owners that rather than crowdfunding you use the prove it system, and the prove it system is prove it by going out and getting your own sales. Getting sales is still more powerful than asking other people for money. However, crowdfunding can be exciting, and it can be a viable option for funding a business. Your job is to explore whether or not it's right for your business.

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