Startup Funding Options – Part 1: Crowdfunding

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Inventors and entrepreneurs should closely analyze the different types of funding that are available, and construct a business and financing structure that works best for them.

Coming up with ideas is not difficult; everyone seems to have some sort of business they would like to start. The step that is always a bit more challenging, however, is funding the idea. If an entrepreneur cannot finance the necessary materials, and cover the costs of the related contracts and filings, his or her great idea will be moot.

One of the most talked about tools for financing new ideas and projects is crowdfunding. Crowdfunding allows anyone to contribute money to a startup business that they believe in or wish to help move forward. The process should begin with a prospectus for potential contributors, detailing the project’s business plan, along with abbreviated versions of their financial strategies and financial projections.

There are many crowdfunding platforms available, with Kickstarter and Indiegogo being two of the most popular. It is also important to be aware that there are many new crowdfunding laws and regulations, regarding the available scope of this type of financing, that have been, or are about to be, passed by both state and federal agencies.

The best thing about crowdfunding, from the entrepreneur’s point of view, is that there is no catch. Unlike venture capitalists or angel investors, contributors to a crowdsourcing campaign most often do not ask for, or receive, any equity in exchange for their contributions – but they may receive a mug, CD or other ephemera. In many ways contributing to a crowdfunded project is reminiscent of donating to public radio or television, in both the appeal for donations and the small gifts that are bestowed onto contributors.

Crowdfunding is new, trendy, and not fully understood by those who use it. Despite its efficacy in certain cases, it is viewed by many as inexpert, with the real possibility of an entrepreneur’s serious appeal being grouped alongside a college student’s drive to finance a party. That is not to say it cannot create real and significant value. The good news is a startup could certainly garner attention and a little bit of traction through the abbreviated projections and strategies, but in the end, it may not be the best way to raise funds.

Join me in my next article where I will explore the benefits and pitfalls of using initial stage, friends-and-family & financing rounds to fund new businesses. In the meantime, you can contact me here to discuss your new idea and how you can fund it.

Aaron Pierce
(212) 882-1752
299 Broadway, Suite 1405
New York, NY 10007

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