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Inventors Insight: Choosing a crowdfunding option for your business

posted Dec 3, 2014, 12:43 AM by J Shaw   [ updated Dec 3, 2014, 12:43 AM ]
At some point in time every business, whether it is a startup or growing, it will need to raise capital. Crowdfunding is an option many businesses are now looking towards for not only raising funds, but validating markets and finding new customers. While, crowdfunding got its start in the late ’90s as a way for musicians and artists to fund projects through donations, that model has since evolved to include four different types of crowdfunding opportunities including; donations, rewards, equity and debt.

Crowdfunding is a process of raising money from a crowd of people, the amount asked for varies depending on the type of crowdfunding being done and the project. If you have been on social media lately you have probably seen people asking to fund their Kickstarter, IndieGOGO or GoFundMe endeavors. Those are examples of crowdfunding platforms. There are in fact more than 2000 different platforms which allow individuals to raise funds for everything from publishing a book to earning enough for a first production run of a new product and now small investors will be able to gain equity in businesses. As this new funding source continues to develop, it is important for entrepreneurs to understand the different types of crowdfunding options available and when to use them. The type of crowdfunding and platform depends on the project or business being funded and each entrepreneur needs to evaluate the objective of the campaign and the markets that the platforms serve before deci ding on which one to use.

Donation Based

The earliest and easiest form of crowdfunding is donation based. Platforms like GoFundMe, Crowdrise and Fundly are strictly donation based, anyone who contributes to a campaign does not get anything in return and the donation may or may not be tax deductible. This type of crowdfunding is most often used to fund causes, like medical bills, charity organizations and other volunteer projects. Some of these platforms will allow campaigners to do indefinite funding which is a great opportunity for smaller nonprofits to attract donations to their causes.

Rewards Based

Platforms like Kickstarter and IndieGOGO have popularized this form of crowdfunding. It is also donation based, but in this case funders who give to the campaign get some form of reward or perk in return for that donation. This platform has become a popular way for businesses to test the market for a new product. This works as a form of pre-selling the product to gauge if there is enough interest to make the product. One of the best examples of this was the success of the Coolest Cooler on Kickstarter this fall, with a record breaking $13 million dollars in donations.

Debt Based and Equity Based

The last two types of crowdfunding are often put into the same category because of the regulations that guide the terms of what can be done. However, each of these offer different opportunities depending on the objective of the funding. Debt is when funders will essentially loan money to the company for a fixed time period and interest. Platforms like Funding Circle and Prosper offer debt based crowdfunding opportunities. Equity crowdfunding is when funders will be able to get some equity stake in the company running the campaign, usually in the form of shares. Platforms like Circle Up, Crowdfunder and many more offer crowdfunding for equity. Typically the companies who are using Debt or Equity crowdfunding are not early stage startups but more established businesses with a track record that funders or investors can look at to determine the risk involved in funding the campaign.

The federal government has not yet released the rules regarding equity crowdfunding, so it is not an option in all states. However, Washington State enacted legislation at the beginning of November that does govern the rules of equity crowdfunding and will be the subject of a free educational session at 1 p.m. Dec. 3 at the Port of Bellingham.

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