November 1, 2014

Crowdfunding: The Answer to Startups’ Financial Woes?

Getting funded is one of the biggest challenges for startups. Venture capitalists and angel investors are bombarded with “great” ideas for businesses, and they can only invest in so many. Banks are turning small businesses away for loans. So what’s a startup founder to do if they need money?

pile of money

Obama says try crowdfunding. Rather than rely on banks or private investors to help get your business running with an injection of cash, put it in the hands of the people. With crowdfunding, anyone can invest in a company (in smaller increments ranging from $5 to $1000). And with President Obama’s JOBS Act, it will be easier for startups to get that funding without jumping through so many hoops.

The Act says that nonaccredited investors (read: you and I) can invest in a company, and that company can raise up to $1 million a year without having to register with the Securities and Exchange Commission (SEC). There have been several crowdfunding websites connecting companies with individuals wanting to invest, but since the JOBS Act was passed, their numbers are at an all-time high.

Where to Find the Crowds

There are generic sites that offer a variety of projects people can contribute to, such as Prosper, as well as others more tailored to specific niches, like the creative projects found on Kickstarter. The Act says that people who invest in these startups are now entitled to stock, and some sites like PeoplesVC will facilitate that transaction once the SEC works out the details. Others like IndieGoGo are more lighthearted and simply offer investors perks like stickers, access to special events and products.

Raising $1 million from total strangers may take as much work as pitching VCs. Many people aren’t convinced that crowdfunding will really work to garner large amounts of money from so many investors. It’s clear that getting your project in front of enough investors to actually meet your financial goal will take a lot of promotion (social media looks like the best avenue), but the key is to have an idea that people can get excited about.

How it Works

Let’s look at bikedabs, a startup seeking funding on the site Fundable. The startup’s profile page on Fundable is detailed, explaining its product (a removable attachment that allows bikers to ride clipless pedals with street shoes). The company aims to raise $25,000, and as of this post, had raised about $5,000. Backers of the project receive a variety of rewards, from a t-shirt to an expensive road bike. It’s clear the backers of this project are excited about it: many have offered their own marketing services and connections to help bikedabs succeed.

Visitors can follow a startup’s path toward funding, get updates and share the project through social channels. It’s truly a new way of supporting small business.

The site takes a fee from the money raised; Peerbackers takes a 5% “success fee” to cover its own expenses. The money doesn’t have to be paid back.

Worth a Shot

For a startup that needs a smaller injection of cash, or that simply wants to try a different path, crowdfunding is worth a try. Remember, the key is self-promotion. Crowdfunding sites are just now starting to be recognized by the general public and media, so educating potential investors on how they work and why they’d want to invest in your company is necessary.

Crowdfunding Sites

IndieGoGo: Variety of types of projects available to fund.  Fee: 9% if you don’t meet your goal; 4% if you do.

PeoplesVC: Variety of types of projects available to fund.  Fee: 9%

KickStarter: Funds Art, Comics, Dance, Design, Fashion, Film, Food, Games, Music, Photography, Publishing, Technology, and Theater projects.  Fee: does not list.

Microventures: Interested in any industry but Real Estate and Oil and Gas.  Fee: $350 up front application fees, plus 10% after funding.


Pile of Money Photo via Shutterstock

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Susan Payton - Awards Communication Mgr.


Susan Payton Susan Payton is the Communications Manager for the Small Business Trends Awards programs. She is the President of Egg Marketing & Communications, an Internet marketing firm specializing in content marketing, social media management and press releases. She is also the Founder of How to Create a Press Release, a free resource for business owners who want to generate their own PR.

6 Reactions

  1. Great post. I am hearing a lot about crowdfunding these days. And I haven’t heard of 3 out of the 4 sites you listed at the bottom of the post. Thanks for the information.

  2. Internet business requires non-stop work 24 hours, 7 days a week. Secondly it is very risky.

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