Crowdfunding is a relatively new way to fund a business. This approach allows individuals to pool their money, usually via a website, and invest in business ideas. Sometimes people invest because they like the mission of the company; others do it to make a profit.
Advocates of crowdfunding say that it allows good ideas to attract start-up cash through the wisdom of the crowd. The new company also has a built-in customer base (through its investors and their personal promotion via word of mouth). However, if you disclose your idea too early, it can be copied and developed by competitors with better financial means. Additionally, a significant risk is the possibility of getting ensnared in securities laws. In November, the House of Representatives passed The Entrepreneur Access to Capital Act amending the Securities Act of 1933. The bill would allow a new registration exemption for companies raising crowdfunded financing. Companies may raise up to $1 million within a 12-month period without registering the securities with the Securities and Exchange Commission (SEC).
Critics of crowdfunding also say that it can cause problems down the road primarily in two areas:
- People invest without knowing the real value of the company. When those same people invest later and they find out the same level of investment isn’t going to buy them as much as it may have before, they can get frustrated (results in either no future investment or negative word-of-mouth).
- It crowds the capitalization table. This may not be an issue if you never intend to sell your business, but most investors do not like to see cap tables with a lot of owners — it becomes too hard to manage when new investments or buyouts are made.
If this is a source that you think would help you, here are a few websites for crowdfunding of entrepreneurial start-ups:
- ProFounder: this is one where investors actually own a piece of the company when all is said and done.
- Startup Addict: investors get rewards based on the generosity of the company founder, but no financial returns.
- Peerbackers: investors get perks or rewards for investing, but no financial returns.
- Apps Funder: for developing of mobile apps. Investors share in the revenue.
- Start Some Good: for connecting social entrepreneurs with people who want to help. No return for investors.
- Kickstarter: for funding creative projects, including artists, journalists, inventors, and film makers. No return for investors.