An alternative to traditional crowdfunding that you can use to fund your startup

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Every entrepreneur has felt the difficulty of raising funds for a business. It costs tens of thousands of dollars to launch even a modest startup, and potentially millions of dollars for a larger or more demanding idea. Old-school tactics like tapping into personal loans or seeking out an angel investor are still going strong, but these days more and more entrepreneurs are harnessing the power of crowdfunding.

The basics of crowdfunding

According to Invest.net, crowdfunding is “an online method of raising capital by which entrepreneurs or small business owners seek funds from the public for future ventures”. This type of campaign attracts many investors, who each play a small role in reaching a fundraising goal by contributing an idea of ​​interest.

By now you are probably familiar with other types of crowdfunding. You may even have contributed to someone else’s crowdfunding campaign. But traditional forms of crowdfunding usually call for contributions in exchange for an expected payment, such as a copy of a product in the future. With equity crowdfunding, contributions will be exchanged for shares in the business – in other words, each contributor to your equity crowdfunding campaign will become a partial owner of your business based on the amount they contribute.

The advantages of crowdfunding

There are several advantages to this model, including:

  • To reach With a crowdfunding campaign, you can hypothetically reach anyone in the world. If you support this campaign with marketing and advertising, you can instantly multiply your initial reach. More potential contributors increase your chances of achieving your financial goals and could increase the total amount of capital you generate.
  • Financial rationalization Equity crowdfunding also simplifies the investment process, thanks to simplified equity crowdfunding platforms that are available to entrepreneurs today. Although there are some legal limitations and regulations that you will need to consider, most of the time the process is simplified.
  • Debt elimination One of the most common ways to finance a business before crowdfunding was to take out loans. But getting into debt is not always a good thing; equity crowdfunding allows you to completely bypass this necessity.
  • Marketing Crowdfunding campaigns can also be a litmus test to gauge the strength of your idea. If no one wants to fund your business, you may need to revisit your business model and revise it to make it stronger.

Related: Will Switching From Kickstarter to Blockchain Make it Easier to Crowdfund Your Next Project?

The weaknesses of crowdfunding

However, there are also some weaknesses, especially when comparing equity crowdfunding to other forms of fundraising:

  • Inherent limitations – The Securities and Exchange Commission (SEC) regulates equity crowdfunding and equity crowdfunding platforms, so there are certain limitations in place. Fortunately, these limitations are quite forgiving; your business must be based in the United States or Canada, and you cannot raise up to $50 million via crowdfunding over a 12 month period (although this may vary depending on the fundraising tier you are using).
  • Costs – Most crowdfunding platforms charge a fee for the privilege of using these platforms for your campaign. Fees vary, but most fees are reasonable. Nevertheless, it is important to know that you will not get all the money for free.
  • Potential for failure – There is no guarantee that your campaign will be successful. If your crowdfunding round fails, you will have wasted a lot of time and still need to raise capital, possibly through a traditional method.
  • Legal requirements – On the surface, equity crowdfunding is relatively simple, but the basic legal frameworks can get complicated. You will likely need to work with a lawyer to make sure everything is up to par.
  • Risks of loss of equity – Some entrepreneurs fear losing part of the capital of their business. When you allow crowdfunding contributors to become partial owners of your business, you necessarily give up some control. Whether or not this is tolerable to you depends on your outlook and business goals.
  • Request for persuasive documents – Most people won’t give money to a business just because it looks good. They want to see a well-thought-out business model and a financial plan with significant potential for future earnings. If you don’t have these compelling documents, you’ll have a hard time raising the capital you need.

Related: 7 Steps to Creating a Crowdfunding Project That Will Bring You the Money You Need

Is equity crowdfunding right for your startup?

Crowdfunding isn’t inherently good or inherently bad, but it’s better for some startups than others. Before making a final decision for your business, consider the following variables:

  • The amount of financing you need
  • Personal goals and objectives
  • Business goals and objectives
  • Willingness to sell equity
  • Willingness to spend time assembling and promoting the campaign
  • Legal experience (and willingness to hire a lawyer)

For many modern entrepreneurs, equity crowdfunding is a godsend. This allows them to quickly and easily accumulate the capital they need to get started without having to search for the perfect individual investor or go into debt. For others, equity crowdfunding is more hassle than it’s worth. Weigh your options carefully before moving forward.

Related: 4 Great Ways to Fund Your New Business

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