Is Crowdfunding An Option?
So you think or even better you know you have the next great idea but Venture capital firms are not giving you the time of day. Don’t fret because you can fund that great idea using alternative methods and make those large VC firms lament the day they turned you down. VC is a $40 billion per year industry generally funding startups between the $1-10 million range.
Access to this capital is very competitive and only the best of the best have a chance of getting funded. Crowdfunding on the other hand gives anyone with an idea the opportunity to get funded.
The Crowdfund Act
Technically it is called H.R. 2930: Entrepreneur Access to Capital Act. The Act will create exemptions to the security laws that prevent companies from asking for investment from people who are not accredited investors. In essence you will become your own venture capital firm with a limit on how much you can invest.
This is what it will do as it is written in the Act:
- Create a Crowdfunding exemption from SEC regulations for firms raising up to $2 million, with individual investments limited to $10,000 or 10% of investors annual income
- Exclude Crowdfunding investors from counting as shareholders for purposes of calculating the 499-shareholder cap under 12 (g) of the Securities Exchange Act
- preempt state law and exempts the ban on general solicitation for the new Crowdfunding exemption
While this form of funding gives opportunity to small investors experienced financial managers are saying it leaves opportunity to fraudulent investments and logistical nightmares trying to deal with that many shareholders.
Kickstarter is a Crowdfunding platform for individuals that have creative ideas.
They support projects in the following categories:
- Art, music,comics
- technology, game design
- film, photography, theater and fashion
The project will only be funded if it fits these categories.
Indiegogo was initially conceived to fund independent movies it has since grown to include all industries. They have raised millions of dollars for campaigns across the world giving anyone with a great idea access to funding for their project.
How Crowdfunding Works
Crowdfunding works by giving individuals or organizations an opportunity to raise funds through their different sites. Each project is given a limited amount of time to raise funds using all of their contacts including family, friends and anyone that’s interested in funding the project.
Each company has different policies regarding how much time you have to raise the funds.
- If it is successful and the project has met its funding goal you will receive the funds and as the project creator you will be responsible for carrying out the details with the investors.
- If the project is not successful and has not met the funding goal the project creator will not receive any of the funds. This policy however does not apply to all Crowdfunding companies.
Make sure you understand how the funds are delivered and what your responsibility is when you accept the money.
As a project creator you are entitled to 100% ownership of the project and any intellectual property but before you sign any agreements make sure you know what you are giving up.
The fees are almost the same across the board at around 5% and remember ou should only pay if you meet the funding goal.
If your startup is not able to convince traditional investors Crowdfunding can be a source of funding to get your project up and running. Before you put your John Hancock anywhere make sure you know what you are getting into because you might be spending more time in the courtroom then in your startup.