A How to Guide for Crowdsource funding for Start-ups

In any industry because it makes it possible for a large number of small money investors to back a new product or service.  Websites like Kickstarter and Indiegogo have helped to raise over a billion dollars for entrepreneurs.  Here are some reasons why crowd source funding might be right for your business.

Good ideas spread quickly on the internet.  This is a huge benefit to any new product or service because publicity is key to any business success.  Investments that would traditionally only be pitched to wealthy businessmen in person can now be exposed to the entire world over the internet.  Blogging, social media and online advertising makes it possible to share ideas with a diverse group of people.  Before crowdsource funding, entrepreneurs never received more funding because an idea went viral. Now a viral idea is a real potential moneymaker to its originator.

SEC rules prevent somebody who gives money to a project on Kickstarter or Indiegogo to take an equity stake in the business.  Entrepreneurs can greatly benefit from this because they can offer goods or services for in exchange for support instead of an equity stake.  This is very useful for a company start-up like a coffee shop.  With crowdsource funding the coffee shop can offer supports with cups of coffee after the shop opens. The shop could offer ten cups of coffee in exchange for $50 of support.  This allows owners to raise funds without diluting their equity.

Do potential investors in your business ask you “how do you plan to make money doing/selling that?” Having a profitable business idea is not a necessity for crowdsource funding.  Many people will help crowdsource a business because they like the idea the business supports.  People who give a few dollars do not expect much in return.  The trick for many businesses is to get a lot of people to give a little support.

This is particularly useful for companies looking to provide goods and services that make the world a better place.  Social entrepreneurs can offer doing a specific good deed in exchange for support. For example, a company that produces an inexpensive water filtration system for people who lack access to clean water could offer to install filtration systems in poor places in exchange for support.  This company might not have a way of producing these systems with good economies of scales without financial support from crowd funding.

Crowdsource funding makes it easier for companies to get funding in new ways. Have a start-up idea look into our other article on how to raise capital for your start-up by crowdfunding. Whether you launch your company through crowdsourcing or through some other strategy it is critical to protect shareholders by incorporating the company.