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Is “Crowdfunding” For You?

(Flickr Photo by ColaBoraBora)

One of the biggest challenges any small business faces is finding the financing to get the business off the ground. A conventional startup would usually consist of someone creating a business plan, contacting a bank, crossing your fingers and praying for approval.

Thanks to some changes in investing by the Securities and Exchange Commission, there are new ways of finding a using venture capital from potential investors. The new law is the Jumpstart Our Business Startups Act (pdf) and it allows private companies to raise up to $1 million in startup or other capital from investors. It has also stopped the ban on “general solicitation” or publicly contacting private companies for investment purposes.

How Does Crowdfunding Work?

Unlike conventional fundraising not everyone who invests using crowdfunding is expecting a monetary return on his or her investment. The investor might receive some type of “perk” down the road for their investment but have no equity or control in the company’s operation.

Some companies will set specific donation amounts that might give some reward related to the product or service of the startup company. Some companies will offer “equity crowdfunding” and they will receive ownership shares in the business but still might not have any say in the day-to-day operation of the business.

Do Investors Like Crowdfunding?

Both investors and entrepreneurs are excited about Crowdfunding. It opens to door to almost unlimited options to be creative with options for your investors. One movie company offered investors a spot in the movie as extras in return for their donations.

Obviously this type of financing is ideal to be promoted on Facebook, Twitter, LinkedIn, etc. Rewards, perks, and return on investment can be all over the place making it ideal to target various groups of investors. If the business is a success then many people benefit. If the business fails no one is going to lose his or her life savings.

In addition, it allows many investors to “test the waters” of new businesses and new ideas. It’s a win-win for both parties.

Some Final Thoughts

Crowdfunding is not a “get rich quick” idea. Like any other investment you should use due diligence and check out all parties and the ideas presented. If you are trying to raise money then review your options and what you can offer potential investors. Get advice from your financial advisor and/or your CPA.

If you are the investor then you have to ask, “What’s in it for me?”

The take away is this — here’s a very attractive way to expand our economy, bring startup businesses into the markets, and create jobs and commerce. Check it out and see if it will work for you.

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