Join Rudolph Rosenberg for an in-depth discussion in this video What is crowdfunding?, part of Entrepreneurship: Raising Startup Capital.
- So, what is crowdfunding? Crowdfunding, as its name states, is a way to raise capital for your company through a large number of investors. That's very different from the traditional way of raising money, which is done through a small number of wealthy investors, or a venture capital firm. Individually, each investor, called in this case a "backer," will invest a relatively small amount of money, but collectively, it can represent tens of thousands of dollars, or even hundreds of thousands of dollars.
In this case, investors are called "backers," because they're actually not investors. In the case of crowdfunding, at the moment of this recording, people that want to put money on your project cannot do it as investors for legal reasons, and have to make donations instead, which are usually rewarded by a gift, or a limited-edition product. Entrepreneurs and backers meet on funding platforms, which are websites dedicated to putting in contact potential backers with entrepreneurs.
Some of the most widely-used websites are Kickstarter.com and Indiegogo.com. On those websites, you can create a project profile, which you will use to market your company and product with the objective of attracting backers and motivating them into giving you the capital to make your project a reality. There have been some huge successes in the field of crowdfunding, and one of the most well-known is the Pebble e-paper watch.
This is the story of an entrepreneur who needed to raise 100 thousand dollars and ended up getting 10 million dollars from backers on Kickstarter. Of course, that's an extreme example of what can happen when you raise capital using crowdfunding, but it's also an example that it can be very successful and get you the capital you need. And as we will see, crowdfunding is best serving very young companies that have a limited connection to the investment world.
- List three variables that will affect the source of capital you choose to fund your company.
- Identify the best strategy most entrepreneurs can use for finding capital and investors for their company.
- Name two elements an entrepreneur must consider when determining the amount of capital their business will need.
- Cite two details that should be included in a business plan to help investors become familiar with what they will be funding and the term of their investment.
- Explain what the JOBS Act did to facilitate crowdfunding for entrepreneurs.
- Summarize the typical characteristics of an angel investor.