Updated November 30, 2011
Funding can be one of the most difficult parts of any venture. Whenever possible the best way of funding your venture is by bootstrapping it, meaning that you fund it yourself or you grow your business through profits. But sometimes your business needs are larger than you can handle by yourself. Originally the typical ways to fund your new or current business venture were:
- Three F’s: Family, Friends and Fools
- Business Loan
- Angel Investment
- Venture Capital
- Public Offering
There is a new method of funding that has sprouted from the wonders of the Internet, Crowdfunding. Crowdfunding allows, individuals, businesses and organizations to raise funds for their project via small donations from a large group of people online. This is a wonderful way of allowing individuals to help others obtain their project goals and dreams by donating a small amount. One of the biggest examples of successful Crowdfunding was President Obama’s 2008 campaign for Presidency, his Crowdfunding campaign raised over $137 million. Another example is the social networking software startup Diaspora raised over $200k using the website service Kickstarter. Because this can be implemented at almost any stage of your venture you could add Crowdfunding to the Three Four F’s:
- Four F’s: Family, Friends, Fans and Fools
If you already have a website with a large community and substantial traffic then you could add a donation button to your existing site, if you have payment processing just add a new tier of products in your store to allow for donations if not you can always add a Paypal or Amazon payments link to your site for donations. If you don’t have a high traffic site there are many sites that will help you post information about your project and help you get it funded. Here is a short list of a few Crowdfunding sites and a brief description of how they work:
Kickstarter is one of the original crowdfunding sites, they have an all or nothing model for funding so if your project does not meet its goal within the allotted time frame then the funds are not awarded to the project and supporters will not be charged.
RocketHub allows Creatives (those seeking funds) and Fuelers (those who help promote and fund projects) a platform for Creatives to ‘launch’ their projects. They allow a Creative to receive funds even if they do not meet their goal, but if they do and exceed their goals there are additional perks.
Quirky is not a traditional crowdfunding site, it is geared towards inventors trying to sell their first product. Your product goes through a community review process, if it passes the review it is further processed through a product development process, if your product shows promise of popularity via their presale stage, it is manufactured and sold you will receive a percentage of the profit.
Pozible (formerly Fundbreak), http://www.pozible.com.au/
Pozible is an Australian crowdfunding site that allow you to create and submit your project, you will need to provide rewards to your donors and you will only receive funding when your goal is met.
Fans Next Door, http://www.fansnextdoor.com/
Fans Next Door is geared towards the arts and creative industries, they allow you to create and submit your project, you will need to provide rewards to your fans and you will only receive funding when your goal is met, otherwise all funds are given back to the donors.
IndieGoGo is a crowdfunding site where you start a campaign for your project, you are free to offer perks for donations for your campaign. They give you a place to start your campaign/pitch and have tools to help you “spread the word” via social media. The big advantage of IndieGoGo is that you do receive funds (at a higher cost rate) even if you do not meet your financial goal.
At the time of this post the site was not in operation.
Profounder helps your organize your business for that next stage of funding after bootstrapping, they help you establish your needs and seek out funding from your Friends and Family (Regulation D, Rule 504). They also help you with their tools for funding via “sophisticated” investors (Regulation D, Rule 506), as this is true investing you will likely be offering equity of your company.
Helpers Unite, http://www.helpersunite.com/
Helpers Unite is a crowdfunding site/service that has a charitable twist, you can help yourself and others at the same time. The projects can be posted for up to 120 days, you do keep the money even if your project does not meet it’s goals. Part of your raised funds will be used for service fees (currently 9%) and for a donation to a charitable organization that you choose as the project organizer.
SeedUps is more of a crowdfunding sites for startup businesses and investors. The Startup will submit a one page opportunity overview and a stement of needed funds. Investors can invest anywhere from $2,500 – $25,000 over a 180 day period. Business startup and investor will then agree to investment terms and your organization can receive funding. SeedUp is an all or nothing funding site, you receive funding when you agree to terms with investors and meet your goal within the 180 day time period.
FundaGeek is a crowdfunding site/service that focus more specifically on research and technology projects. They are an all or nothing funding model, meaning that if you do not reach your funding goal by your deadline then your project will not be funded and the project backers will not be charged.
Depending on your venture or project you should seek the advise of a financial and legal professional to determine the legal and tax ramifications of raising your funds.
Be aware that the laws are catching up to these new technologies and ways of funding. The US government has proposed legislation to address crowdfunding for businesses and investors. If you would like to learn more:
- S. 1791: http://thomas.loc.gov/cgi-bin/bdquery/z?d112:S.1791:
- H.R. 2930: http://thomas.loc.gov/cgi-bin/query/z?c112:H.R.2930:
- BusinessWeek chart describing the proposed law: http://www.businessweek.com/magazine/crowdfunding-dont-call-it-an-ipo-11172011-gfx.html