Small Business Pam Watson Korbel
|Pam Watson Korbel is an expert on small business and revenue growth. She personally managed exponential growth in two companies: a software firm that grew by 500% in four years and a health care firm that grew by 1800% in eight years. In addition, she has been advising fast growth companies as a coach and consultant since 1996.|
Crowdfunding is a business service that became possible through the success of the Internet and expansion of its capabilities. Considered an “alternative funding” option, crowdfunding incorporates a methodology to raise small amounts of capital through a collective effort to launch a cause, project, product or business.
In its simplest form, an entrepreneur uses online marketing tactics, especially social media, to drive potential investors to a crowdfunding platform to present an idea and solicit funds. While online fundraising is not a requirement for true crowdfunding, some participants use direct mail, events and other methods to achieve their goals.
Four types of crowdfunding are available:
Generally, individuals and companies who raise funds using the crowdfunding methodology utilize an Internet-mediated service called a “crowdfunding platform.” The U.S. Securities Exchange Commission and most state governments provide regulations about how to set up and manage a crowdfunding platform. These agencies also have determined the rules about protecting investors and entrepreneurs.
Hundreds of crowdfunding platforms are available through the Internet and can be found via searches as well as reviews by current and former patrons. The top three platforms include Kickstarter, GoFundMe and Indiegogo. This is a dynamic field so entrepreneurs and investors are well-advised to do their own research about crowdfunding platforms.
When a business uses a crowdfunding site, its owners provide a presentation about the project, product, idea or business as a means to influence potential investors who then make commitments through the portal to become involved. Campaigns are developed with an associated dollar goal and timeframe. Potential investors often learn about the opportunities through social media or other forms of online marketing.
Different platforms manage the commitments differently, however, generally three possible actions result: the campaign is successful and funded; the campaign falls short of the dollar goal and is funded with what is made available; and the campaign does not reach the dollar goal and is not funded.
Several organizations have successfully raised money with crowdfunding. One successful crowdfunding venture includes Goldiebox, a company marketing construction toys and books for girls, which raised over $285,000 and now markets through Toys R Us. Another is Ouya, a video gaming company, that raised $8.5 million from 63,000 people on a goal of $950,000.
The advantages of crowdfunding primarily revolve around efficiency of making an offer and getting visibility with many more prospects quickly. The investor pool is larger than traditional funding methods and it is easier to promote the opportunities. Frequently, entrepreneurs receive valuable input from potential investors throughout the process as well.
The disadvantages can be understanding the credibility of the company, investors and platforms. In addition, regulations do not fully protect backers and ventures may disappear or cease pursuit of the stated opportunities.
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