The internet has made almost everything easier, including raising money. Crowdfunding sites give you a central place to raise small amounts of money from multiple people for your financial needs. You can use crowdfunding to raise startup costs but there are a few things you need to know first.
Using Crowdfunding to Raise Startup Funds
Crowdfunding can be a great way to line up money to fund your new business. You simply set a goal, create a page on a reputable crowdfunding site and share the link on social media. Your friends, family and acquaintances who believe in what you're doing can then donate funds to help you get started.
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People who donate to charitable crowdfunding often do so because they believe in the cause. The same can hold true for non-charitable crowdfunding, as long as the work you're doing appeals to those who participate.
But perhaps one of the best things a business can do to get funding is to offer a product or service once available. Instead of "donating," people are actually making a purchase. This motivation is even stronger if participants will be among the first wave of those getting access to what you're selling.
Crowdfunding Legal Concerns
The U.S. Securities and Exchange Commission allows businesses to raise money through crowdfunding, thanks to Title III of the Jobs Act. This ruling allows businesses to raise money through crowdfunding as long as these requirements are met:
- Funds must be managed through an intermediary such as an online crowdfunding platform
- Business can raise no more than $5 million through crowdfunding in any 12-month period.
- Funds raised must be disclosed in filings with the SEC, as well as to all investors and the crowdfunding site itself.
How Crowdfunding Works
Raising money through crowdfunding starts with finding the right platform. Kickstarter, Indiegogo, Patreon and Fundable are all popular options, but there are others that might apply. Research other businesses with campaigns on these sites and note whether the most successful businesses have customer bases similar to yours.
Once you've identified a platform, it's time to write your pitch. A good pitch is important in convincing people to invest. You'll also need high-quality images of your product and, if possible, a video that demonstrates your offerings and can win over those who are on the fence about giving.
Successful Crowdfunding Campaign Examples
As you're preparing your crowdfunding pitch, take a look around at some of the big success stories.
- Pebble: This startup raised more than $20 million on Kickstarter for its smartwatch.
- Oculus: Before being purchased by Facebook, the Oculus Rift virtual reality headset was launched via a Kickstarter campaign that eventually earned $2.4 million.
- PopSocket: If you haven't heard of this gadget, chances are your kids have. PopSocket got its start on Kickstarter, where it reached its $12,000 goal in only five days.
Crowdfunding and Accountability
When investors put money into a business, they're looking for a return on their money. For those giving money to a startup, though, the end goal is different. The biggest issue comes when a campaign doesn't reach its goal and you have to refund all the money, especially if you were prepared to send inventory to all those potential customers.
In addition to having to issue refunds if the campaign doesn't meet its goal, you also need to keep taxes in mind. If your business campaign is for-profit, you will have to report the funds on your tax return. You may also owe state sales tax on the funds, so you'll need to be set up to report all of this before you start spending your earnings.
- Frontiers in Psychology: Why Do People Support Online Crowdfunding Charities? A Case Study From China
- U.S. Securities and Exchange Commission: Regulation Crowdfunding
- Kickstarter: Pebble Time - Awesome Smartwatch, No Compromises
- Kickstarter: Oculus Rift: Step Into the Game
- Journal of Accountancy: Donation-Based Crowdfunding and Nontaxable Gifts