Crowdfunding is an easy concept – receive smaller amounts of money from many people to make a project, business idea, or new product happen. This concept may seem like an answer to an entrepreneur’s prayers if you’re struggling to get a small business loan or raise the capital needed to fund a new product or expand your current capabilities. However, a plate of cold spaghetti is easier to straighten out than the reality of crowdfunding. So we wanted to give you some basics to help you sort it all out: 
Types of Crowdfunds
In crowdfunding there is free money, not so free money, money with strings attached, and money you have to pay back.
- Donation-based crowdfunding is generally used for charity fundraising. People give money to a cause and their reward is the good feeling of contributing – and possibly a tax deduction.
- Reward-based crowdfunding gives the crowd a reward – generally the product or service being funded – in return for their contributions. This gives the funders something more than a warm feeling, but they do lose any chance of a tax write off.
- Equity-based crowdfunding is money for shares in the company. Theoretically, by having a stake in the company, the funders are more interested in the success of the venture and likely to provide support/guidance/introductions along with cash. Equity-based crowdfunding is so new (read legal), that there is not enough data to know how well it really works.
- Debt crowdfunding is a loan from the crowd to the venture. The terms are likely to be more generous than from a traditional lender, but repayment is mandatory.
Crowdfunding Challenges 
For every crowdfunding success, there are multiple failures. Four common challenges face entrepreneurs looking to crowdfund:
- Choosing the right platform: Not every crowdfunding site is suitable for every venture. Multi-million dollar raises are rare for the public-use platforms such as Kickstarter and Indiegogo. For equity-based and high dollar campaigns, the quantity, type, and focus of the portal’s investor pool is important information. The rule of thumb: the more investors, the better.
- Being realistic: There are time limits on crowdfunding campaigns; there must be reasonable expectations – based on investor research – of how much money will come in during the campaign period.
- Expecting the crowdfunding site to do it all: Crowdfunding campaigns that are “set up and let go” are sure to fail. Interest needs raising and maintaining – through publicity and parallel fundraisers.
- Finding the “Lead Investor”: Getting the first contributor is always difficult. People hesitate to give to something no one else is giving to. Additionally, a history of small investments is sure to perpetuate more small investments.
While it takes some work to set up and get started, may entrepreneurs and small business owners have had tremendous success with crowdfunding. By doing a little research, finding the right crowdfund, and avoiding the pitfalls we’ve listed, you could be well on your way to raising the money you need to make your business dreams a reality!
What do you think of crowdfunding? Would you invest in a business idea or concept you thought worthwhile? Please leave a comment and tell us what you think!
