“The unique value of crowdfunding is not money, it is community.” – Ethan Mollick, renowned professor at Wharton
GoFundMe, Kickstarter, Indiegogo, and Patreon… You may have heard of these websites and maybe even donated money through one of them, but have you ever wondered how they work, and if they could benefit you and your business? After all, there are many crowdfunding success stories out there. But the reality is that it’s not as easy as it sounds.
Crowdfunding, defined. Crowdfunding, in essence, is a method of fundraising for your startup or business or cause. It is the method of raising capital from the small monetary donations of a large number of individuals. Therefore, it is up to the startup to capture and enthrall a wide audience and convince them to donate their hard-earned cash to a particular project.
How does it work?
- For websites like Kickstarter and Indiegogo, you can offer exclusive perks and rewards when people pledge money to your project. Names you may recognize now employed rewards-based crowdfunding, much to their eventual success—Oculus Rift, a Veronica Mars movie, the Tile app, affordable 3D printers, and the now-defunct Pebble watch.
- Allowing you to leapfrog over traditional bank loan financing is peer-to-peer lending on websites like Lending Club. Peer-to-peer loans connect projects that need funding to individuals who have money they are willing to “loan” you with interest.
- For the budding philanthropists in society, GoFundMe has typically been a website where people who need financial help can receive donations from kind-hearted individuals.
- In some cases, you can even exchange a small portion of equity or ownership to the company for an individual’s donation.
It should come as no surprise then that the Securities and Exchange Commission (SEC) regulates this form of fundraising. The Trembly Law Firm can help you with the legal aspects of crowdfunding if you are considering going this route.
The pros and cons. With crowdfunding, you can effectively fund your startup without necessarily having to portion out shares to your company. It allows you to have a committed number of individuals who are excited about your products, and are likely to be more invested in any future products that you come up with. Your brand gets its own brand ambassadors for free! Of course, you have to deliver. There have been some horror stories in crowdfunding where the startup (looking at you, Pebble) was unprepared to deliver the rewards they promised to those who bought into the exclusive perks and rewards. You have to be confident that you can keep up with production costs and logistics after you’ve generated that money. Moreover, keeping the interest and the momentum for your product is difficult. You have to invest time and money into generating interest so that you can reach your goals. Some crowdfunding campaigns can be very all-or-nothing, so if you don’t reach a certain goal, your product can’t take off.
The Business Firm for Business People
At the Trembly Law Firm, we are always excited to help Florida businesses, whether you are a startup or an established company. We understand the challenges that startups face in raising capital for their startup, and we are here to help you explore your options. Call us at (305) 431-5678 or contact us to schedule a consultation!