Crowdfunding is just what it sounds like. A group of people get together, often via the internet, to support a project, an event, a social effort or a startup company they think promising or valuable in some way. These are often a “crowd” of diverse individuals whose only common thread is their interest in the thing they are supporting.
How does it work?
There are a number of platforms which exist to enable a project to be crowdfunded. In fact there are a large number (well over 500). Although all have the ultimate aim of connecting investor (or donor) to a great project, they may do so in different ways. Kickstarter allows applicants to send out solicitations. A funding goal is set (say 10 thousand dollars) and pledges are collected when there are enough backers to meet that goal. Pledge money is collected via Amazon checkout. It is a very efficient model.
While Kickstarter funds many creative projects, RockThePost exists to showcase high quality startups. And whereas donations on Kickstarter are exactly that…donations, RockThePost offers equity participation in startups to interested investors. It is a chance to get in on the ground floor for those interested in the next exciting opportunity. To the startups it is a chance to get that first, crucial infusion of capital. The recently passed “JOBS Act” has made this mode of investment more legal and available. Without this sort of “pre-investment” many great ideas and products might die before they were born!
Are there any negatives?
Of course there are. As with anything that seems almost too good to be true, an entrepreneur has to be careful. One of the most important things to understand is the terms and conditions of the platform you want to use. It is very important that the money you raise not be “too expensive”. Seek investors and funding is a cost efficient way. Don’t give away too much of your company! But also be realistic. You are asking people to give money to an untested project. Make sure you are offering a “value proposition.”
How can I get my new company financed this way?
The first steps are on you. Make sure the startup you want funded will be seen as serious and attractive. Define who you are and what you are offering clearly. Emphasize what is unique and in demand.
Show that while you are small now, you are preparing for future success, Incorporate your company. This provides reassurance to your potential investors in that you are creating a secure environment for their equity holdings. And if you incorporate in Delaware, that is even better. Delaware is the home of many, if not most, IPOs (initial public offerings) in the US. If you incorporate in Delaware you are saying very clearly that I expect my start up to have explosive potential. You are not only working but also prepared for exactly that!