Crowd funding is a new way for small businesses, and especially start-ups, to raise capital. It raises this money from several investors, and the whole process usually takes place online. There are various websites that are dedicated to providing a platform for small businesses to present their venture to potential investors. The investors then decide whether or not to support the venture. Crowd funding provides a great alternative to many start-ups who do not qualify for other types of financing such as bank loans.
Most crowd funding activities currently take place in the United States, thanks in large part to the signing into law of the JOBS Act. This law allows virtually anyone to invest in any business. There is however a set limit of $1 million per investor, although the total number of investors that can invest in the venture is itself not limited. This means that a venture can potentially attract millions of dollars in investment.
The law also regulates crowd funding websites by requiring them to register with the SEC and to act as a middleman. Further, the law requires that a business wishing to benefit from crowd funding provides all necessary documentation, such as a business plan or bank records, that show potential investors that it represents a solid investment.
Crowd funding can help a business in several ways, and here are four of them.
- Reduction of pressure on family or friends for funding
Given that the sources of external funding available to start-ups are limited, many small businesses usually turn to family or friends for this much needed capital injection. The needs for funding, especially during the growth stage of the business, are usually increasing, leading to increased pressure on one’s relations for more and more money. This usually leads to increased friction, with the family members beginning to experience donor fatigue while others start demanding to see a return on their investment.
With crowd funding now increasingly available to many start-ups, the owners will no longer be forced to only turn to their loved ones, but will have a wider pool of potential investors that they can seek funding from. This helps reduce the level of pressure on loved ones, as well as the resultant friction.
- Reduction of entrepreneurial risk
Crowd funding can help your business by reducing entrepreneurial risk. It does this by helping to determine whether there’s a need for your business’s products or services before you launch the business. It achieves this by having potential consumers being the ones investing in your venture in the anticipation of getting to use your product or service, while at the same time getting to benefit from its success.
- Generation of marketing buzz
Crowd funding helps you to market your company to potential investors and customers as you go about seeking funding. So while not everybody who listens to your sales pitch will invest in your business, at least they will know about it and will seek out your products or services when they are launched and thus potentially become consumers.
- Provision of proof of viability
A crowd funding campaign that generates positive results will indicate to potential investors that there could be a healthy demand for the business’s products or services and this is the reason for the campaign’s success. These investors will want to get on board, since they will have gotten some potent proof that they could be dealing with a viable venture.
The potential of crowd funding to young businesses is unparalleled, especially in its ability to help them raise funds relatively easily and cheaply. It is thus definitely an option worth exploring by many small business owners.