Q: How can I use crowdfunding to help fund my startup?
A: Crowdfunding has shifted the funding landscape and allowed businesses to secure funds from a community of supporters rather than from a single lender. Here are some dos and don'ts of crowdfunding:
Do understand the three primary types of crowdfunding, each with different goals and risks.
- Rewards-based - asking your backers for capital in return for an incentive
- Equity crowdfunding - giving away equity in exchange for capital
- Peer to peer lending - taking on debt that you're legally obligated to pay back
Before you get started, you need to have a full understanding of the type of funding you're looking for and the amount of risk you're willing to assume.
Do select the right crowdfunding platform.
Each crowdfunding platform is set up to serve a different purpose and audience, so choose the one that fits best with your business type and goal.
- Kickstarter - the big name; for tech and creative entrepreneurs
- Indiegogo - great for tech startups and community projects
- CircleUp - ideal for equity funding for consumer brands
- LendingClub - a go-to for business loans
- Patreon - great for creatives and designers
- GoFundMe - the best for personal fundraising
- Causes - built for non-profits
Do fulfill your obligation to crowdfunding lenders after your launch.
As crowdfunding has grown as a serious startup funding option, so too has the attention of government consumer protection bureaus towards these platforms. Deceptive crowdfunding campaigns can be quickly shut down and fined. Know the rules, and play by them so you don't find yourself fighting a legal battle while trying to launch your business.
Don't launch a crowdfunding campaign before you've formed an entity.
You don't want to be left personally liable if your business has spent all of the money on development and has nothing to show for it at the end, and your backers want their money back.
Don't fail to manage expectations.
Delays in business are inevitable, especially for a startup. When you're promising a product by a certain timeframe during your campaign, don't overpromise. Manage the expectations of your backers by keeping them in the loop as your business progresses, and set realistic timelines along the way.
Don't forget to pay taxes on funds raised. Rewards-based campaigns bringing in cash are typically viewed by the IRS as taxable business income. Consult with your accountant before beginning any crowdfunding campaign.
Crowdfunding, like any means of fundraising, comes with its own risks and hurdles. Do your research, consult with professionals, and reach out to SCORE for the advice and mentorship you need to succeed.
