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The New Business Loan: Crowdfunding

Frankie-squintingby Yvonne DiVita

It's not really new. It's been around a bit - certainly, smart, innovative thinkers recognized the value of tapping into your community/network for funds, long before they decided to call it CrowdFunding. (aka crowdsourcing) Think of it as American Idol for small businesses - who loves you enough to vote for you by sending you $$?

Crowdfund your way to success describes it like this: Let’s say you want to fund a sandwich shop. You’d list your business on one of the various crowdfunding sites (see below) and offer to name a sandwich after someone for a month in exchange for, say, $100. Do that 50 times, and you’ve got $5,000. A filmmaker looking to finance his movie might offer a credit at the end in exchange for an investment of, say, $250. One woman in need of a new boat hull for a trip around the world promised investors a postcard from each of her many stops, and even that worked.

Many of us have already done this without thinking twice about it. Recently, the Art as Action group raised funds for their performances using Kickstarter. I've donated to several ideas via Kickstarter. One drawback with that particular program is that you don't get the money unless you raise the full amount asked for. So, if you need $3000, and ask for $3000 and raise $2950... you get nothing. The donations go back to those who made them. <sigh>

A new one on me is Fundly. We heard about this yesterday when at the AAHA conference in Denver. A nice young veterinary student named Danyel Wynn stopped by and asked our advice on how to raise funds to help her get to Africa to spend time volunteering there. She only needs $5000 and the project is well worth funding, but she's just one young woman and doesn't have a lot of family to tap into. So, she set up a Fundly account and connected it to her Facebook page. Hop over and donate $25 if you have time. Really... that's a small Summer-in-Africa number, but, as with most crowdfunding, the small numbers add up over time. This girl only has till the middle of April to meet her goal. We should help her, don't you think?

I've considered this myself. Tap into the people who love me. :-)  Raise some money for new website design, to push this blog to the next level, to create a trusted, safe place for people to get the right small business information, relevant to working with women. But, I always pull back. I feel dedicated to supporting myself. And, the sheer number needed can be overwhelming. 

And, therein lies the issue, sometimes. Is crowdfunding a good idea or not? Opening yourself up to strangers can be scary. Let's face it - our friends and family will hop on board, at $25 or whatever price they can afford, but you need a hundred or more to make the fundraising worthwhile. So, you need to ask family and friends to share with their networks...and you never know who is going to see your request. Not to mention, when you do this - there's an element of "need" and who wants to appear needy? Not me!

As a last note, some folks shy away because they don't think it's legal. Turns out, it is. The crowdfunding article cited earlier states, "Now maybe you’re wondering whether this is legal. The answer is a qualified yes. Essentially, since a crowdfunding campaign solicits not an investment but rather a payment in exchange for a perk given by the business, the transaction doesn’t really constitute the sale of a “security” for Securities and Exchange Commission purposes. (That said, there is currently an effort to get the SEC to specifically exempt crowdfunding from securities laws. You can learn more about that here.)

Have you ever done this? WOULD you ever do it? If so, under what circumstances? 

Lip-sticking is part of an online influencer network for Business on Main. I receive incentives to share my views on a monthly basis. All opinions are 100% mine.

Comments

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Uri

Hi thanks for this- this is really insightful. I the main takeaway for me are that the challenged you mentioned (e.g. fraud) can be overcome by a good platform - so there is definitely a good business case for developing and promoting such platforms.
Thinking about it - how would you think Facebook would have grown and developed if insted of going public, it would have crowd sourced?

Yvonne DiVita

Great points, Lee. To me, however, I spent time talking with this young lady, we went to her Facebook page, and we did our due diligence, so I felt okay promoting her cause (also know someone else who is doing it). But, I take your words to heart because there is much we don't know, much we can't know, and much we need to learn.

Lee Drake

The fundamental issues with crowdfunding that I see are as follows:

1) If you offer ANYTHING in return, be it a credit, a product, a service or even just "enhanced access" - you have just done a financial transaction. Better be sure it's on the up and up with your tax accountant, that you have all the proper forms in place, and that you're really prepared to start a company. Because many of these crowdfunded startups may well not be at that point and they are risking personal liability.

2) It's incredibly susceptible to fraud. You say you met a young lady at a conference. And she has a facebook page and is looking to raise $5000 for a trip to do good in Africa. There is really nothing to prevent her from taking the $5000 and having a nice vacation on an expensive cruise instead. You don't ACTUALLY know her, and to get to $5000, it's unlikely that all the people donating actually know her either. They trust the friend (like you) who referred them - but who knows how much the original recommendation was trustworthy. (I'm NOT saying this gal is trying to rip you off - I'm just saying there's not a lot of "Fraud control" in these crowdfunding sources.

3) If you are offering any sorts of shares in the company, guarantees of percentages of future profits, or any other non-tangible benefit you're opening up for all sorts of securities and exchange issues. Even Zuckerberg fell into this trap (in a sense much of facebook was crowdsourced from friends and family and others) - he promised all sorts of things that eventually cost him millions of dollars.

4) In India at least, microloans - being unregulated by the banking industry - have evolved into a troubling industry of sort of a mafia oriented loan shark industry where people's lives and livelihoods have been threatened by the organizations running the microloan companies - in the meantime overseas crowdsource members are blithely giving dollars to these organizations believing they are helping the poor. I think there needs to be some banking level of oversight of any company soliciting funds - whether for themselves or others.

That said I think that thinking outside the box is a good thing, and that with proper controls, and proper audits, this could be a source for the low-end of the capital investment strategy. I'm just saying to be careful out there - not everyone is on the up and up. Don't be the sucker born every minute :)

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