Small Business Crowdfunding Basics

Wednesday February 22, 2017

Crowdsurfing the New Financial Waters

When it comes to tracking down financing on the Small Business Battlefield, the first rule is to stand out from the crowd. It's about being the "scene" and not the "herd". Just remember that crowds are important, even vital resources when traditional lenders are overly cautious. The whole landscape of successful crowdfunding is still new, and a lot of companies have been treating it with suspicion - or even scorn. We're long past the time where "alternative financing" platforms can be ignored, though. 2016 proved that, and in 2017 it looks like things are only going to move faster.

The more the ground under your feet shifts, the more you have to change your stance to stay upright. 2016 was a big year for crowdfunding. If we had to stick a pin in the moment it changed from being a useful short-term tool for small businesses and a legitimate, first-choice financing option for any size of enterprise, then that's where we'd stick it. The thing is, with so many people diving into the crowdfunding pool, we're seeing a lot of them finding the waters either too hot or too deep. There have been some amazing success stories, but some dire cautionary tales as well. Even extremely well-funded projects can collapse under their own weight if they aren't working to a carefully thought-out plan. Investors with burned fingers aren't likely to take the same risks twice, and a bad reputation can kill an otherwise healthy business.

At RIFT Accounting, we've worked hard to become the best guides and trackers for small business explorers.  Here are a few signpost to help you navigate this strange new world of finance.
Your investors are family.

In some cases, of course, this is literally true. Loans and investments from family members can be a huge boost when you're starting up. In crowdfunding, though, we're talking about building a community. Don't stop talking to the people supporting you once you've prised some cash out of their fingers. Ideally, you want to build your following months before you start formally asking for money. Email marketing's a good cornerstone, as long as you know you're reaching the right people, but try to keep things personalised. The line between a great email campaign and a catastrophic spam crisis can be a fine one.

Social media can be absolutely crucial, if you understand what's involved. Remember that you're building a network here. It's not about bellowing how great you are and jamming your fingers in your ears when people ask questions. The key strength of social media campaigns is getting feedback and having conversations. Roll your sleeves up and get involved with the community you're creating. Be accessible and available. If there are concerns, don't ignore them or brush them off. That's not how families work.
Let people know what they're getting, and what they're risking.

Crowdfunding the right way means being realistic and honest. It's not just money you're asking people to pump into your business; you're also asking for faith. The more open you are with investors, the stronger their bond with you will be.

It's critical to let people know what they're getting for their money, too. There are two basic forms of crowdfunding: reward-based and equity-based. With a reward-based model, you're offering "perks", which a lot of people assume means they're "buying" something from you. Depending on how you're set up, and what kind of challenges you face, that may or may not turn out to be true. If there's a chance your project may never make it to completion, make sure everyone knows it before they lay down any cash.

For equity crowdfunding, you actually are selling something: a portion of your business. Again, you have to be clear with investors as to what they're actually getting. Enthusiasm is a huge driving force in crowdfunding, but that same sense of excitement and discovery can easily lead to dodgy decision-making. Make sure your investors are properly clued-up before they open their wallets. The same goes for you as well. Simple things like not understanding the admin costs of issuing shares or lacking the capacity to keep investors informed can sink businesses fast.
You've got to know the rules to play the game.

Crowdfunding is still a relatively new concept, and laws around the world are scrambling to keep up with it. You've got to know before you start what the legal implications of your project are. Depending on the crowdfunding you use, you might get some guidance or protection here. Don't rely exclusively on second-hand information, though. Do your own research wherever possible.
While we're talking about platforms, make sure the one you're using's reputable. As crowdfunding's popularity continues to explode, the risk of falling foul of a dodgy platform ramp up with it. Always get professional advice if you're not sure who you're dealing with.

Alternative finance is definitely here to stay, at least for the foreseeable future, as more and bigger businesses are starting to take it seriously. Crowdfunding is leading this charge right now, with many dynamic new businesses blasting off on the back of successful campaigns. Like any uncharted territory, though, you've got to go in prepared for the unexpected. It's a whole new world out there, and we want to see you plant your flag in it.

Stay alert, stay healthy and stay on the lookout for more Voices from the RIFT...

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