Crowdfunding Dos and Don’ts for Small Businesses

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There are multiple ways for a small start-up business to secure the funding it needs to get off the ground. Crowdfunding has shifted the funding landscape and allowed businesses to secure start-up costs from a community of supporters rather than from a single lender. Here are the dos and don’ts of crowdfunding with tips for how you can successfully crowdfund your way to launch day.

For all of these reasons, more and more entrepreneurs in recent years have shifted from traditional funding to crowdfunding to get the money they need to bring their product or service to market.

Crowdfunding has changed the rules of startup financing and opened up a new pool of capital for entrepreneurs.

Crowdfunding has shifted startup fundraising from a single lender model to a collective virtual effort, giving a startup financial support while instantly introducing the business to potential customers.

According to SCORE mentor and Portland Maine business attorney Chris Dargie, crowdfunding has rapidly become an accepted way to raise capital for small businesses.

“Traditionally, companies raised capital by issuing debt or equity,” said Dargie. “Rewards-based crowdfunding introduced a completely new alternative. The model has shown that the public is willing to contribute capital to worthy projects without any expectation of future profit, which is quite revolutionary.”

There’s a right way and a wrong way to crowdfund

While crowdfunding is a great way to finance your startup, it’s not a silver bullet. According to Dargie, there’s a right wayto approach this type of funding. Here are his suggested Dos and Don’ts of crowdfunding.

Do:
• Understand the Different Types of Funding

There are three primary types of crowdfunding, each with different goals and risks.

o Rewards-Based Crowdfunding
Asking your backers for capital in return for an incentive.

o Equity Crowdfunding

Giving away equity in exchange for capital. 

o 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.

Select the Right Crowdfunding PlatformDon’t automatically select the platform you’re most familiar with. 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.

Some of the most commonly-used crowdfunding platforms out there include: 

o Kickstarter – the big name in crowdfunding for tech and creative entrepreneurs

o GoFundMe – the best for personal fundraising

o Indiegogo – great for tech startups and community projects

o Causes – built for non-profitso Patreon – great for creatives and designers

o CircleUp – ideal for equity funding for consumer brands 

o LendingClub – a go-to for business loans

Fulfill Your Obligation to Crowdfunding Lenders After Your Launch
As crowdfunding has grown as a serious startup funding option, so has the attention of government consumer protection bureaus towards these platforms. Deceptive crowdfunding campaigns are 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 get your business off the ground.

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 a crowdfunding 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.
• Launch a Crowdfunding Campaign Before You’ve Formed an Entity
You need to legally form your business entity before you begin your crowdfunding campaign Dargie added, “You don’t want to be left holding the bag personally if your business has spent all the money on development and has nothing to show for it at the end, and the backers want their money back.”

Crowdfunding is a great way for entrepreneurs to get their businesses launched fast without relying on a bank or single lender. Like any means of fundraising, though, it comes with its own risks and hurdles. Do your research and consult other professionals who have been through the process, like a SCORE mentor. A SCORE mentor will work with you to start the crowdfunding campaign, find a financial advisor who can support you, and help you put the funds to work immediately to launch your business. Contact a SCORE mentor today.

Yusef Muhammad
Southwest Regional Vice President, SCORE


Since 1964, SCORE “Mentors to America’s Small Business” has helped more than 11 million aspiring entrepreneurs and small business owners through mentoring and business workshops. More than 10,000 volunteer business mentors in over 250 chapters serve their communities through entrepreneur education dedicated to the formation, growth and success of small businesses. For more information about starting or operating a small business, call 1-800-634-0245 for the SCORE chapter nearest you. Visit 
SCORE at www.score.org.


Funded in part through a Cooperative Agreement with the U.S. Small Business Administration. All opinions, conclusions, and/orrecommendations expressed herein are those of the author(s) and do not necessarily reflect the views of the SBA.

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