We don’t have to look far past our smartphones to recognize that a great idea can change the world. But in this digital age, when everyone seems to have an idea, it can be challenging to get a project off the ground. Crowdfunding sites like IndieGogo and Kickstarter popped up to provide a solution, by offering perks to early adopters of technology and products in exchange for funding, and by 2015 the crowdfunding industry was estimated to have generated $34 billion in revenue — a figure that’s projected to grow to $96 billion by 2025.
The Securities and Exchange Commission (SEC) recently announced long-awaited new rules affecting equity crowdfunding. Entrepreneurs have every right to be excited, since these new rules will open up new avenues for raising money starting in the spring of 2016. But they also need to understand that with every new opportunity comes a cost, and this one is no different. What are these new rules and how do they affect your ability to raise money for your business?
In what can be considered a historic day for startups, small businesses and entrepreneurs all across the United States, on November 2, 2015 the Securities and Exchange Committee (SEC) voted 3 to 1 to approve the final rules for debt and equity crowdfunding (aka Regulation Crowdfunding). In about 180 days, tech startups and Main Street businesses will be able to raise up to $1 million from their friends, followers, and community via SEC registered websites. There is a lot you need to know about the new rules.
Possible investors for your business fall into four categories: Friends and family, Crowdfunding, Angel Financing, and Venture Capital. The first two are within the reach of most businesses, while the latter two are options for a very specific – and small – group of businesses. Friends and family are the low-hanging fruit of investors. It may be easy to talk Mom and Dad, your siblings, etc., into investing in your business, and to do so with minimal paperwork. If your business does not perform to plan, however, it’s also easy to imagine the awkward discussions at the holidays when they ask about how your business – and their investment – is doing.
Crowdfunding isn’t going to work for everyone. If you don’t participate in social media, have an active mailing (email) or understand how to ask for donations, you can stop reading right here. Here are some basic questions to help you figure out if you can play in this arena: Do you have a business plan and how long have you been in business? Do you have any marketing experience or ability? How big is your database and does that list include Facebook, LinkedIn and Twitter or other sites, like Tumblr, Instagram, and Pinterest?
Thinking about raising money through crowdfunding? Crowdfunding CAN help you grow your business and make money, but most crowdfunding campaigns fail and there is no such thing as easy money. If you can’t get 30 percent of your initial fundraising goal pre-committed to your campaign through your personal connections, don’t even bother starting, because you are most likely to fail.