Finding funding for your business startup just got a lot easier. Congress recently passed the JOBS Act that allows small businesses to secure up to $1 million in capital using crowdfunding but is it right for your business? Some experts say to be careful when entering this relatively new and unknown territory.
What is it?
Let’s say that you have a great idea for a new startup. Using your knowledge of the baking business, you have an idea for a vending machine that will make custom cupcakes. You pick the flavor, the icing, and the toping you want on your cupcake. Once you make the choices and pay your money, what pops out is an insanely delicious cupcake made by your imagination.
The problem is that you have more ideas than money so you come up with this novel idea. What if you put your idea online and ask for investors. They don’t have to be the big venture capital people. Instead, you would be happy with a couple thousand investors who gave you anywhere from a few hundred to a few thousand dollars. You would use that money to launch your business.
That’s crowdfunding and until recently, it was illegal under SEC rules but not anymore. There are some problems with crowdfunding that you should know about.
First, the crowdfunding sites worth using aren’t going to follow the business model that we laid out above. In reality, crowdfunding in terms of an investment will be at much higher amounts from a sophisticated group of investors who will scrutinize your business plan even more than if you were in front of them. If you need large amounts of capital, sites like kickstarter isn’t the place to go. You’re going to need people with deeper pockets for your cupcake idea.
Next, you’re going to need to be a real business. That means that you’ve always registered as an LLC or other corporate entity, you have articles of organization, and you can supply the need documentation as required by the new law. All of these disclosure documents may require you getting the help of an account and attorney.
Finally, don’t expect crowdfunding to be the answer to your capital problems if other investors have turned you down. If investors said no, revamp your business plan before seeking this type of funding.
Crowdfunding is in its infancy and business owners are advised to seek more traditional means of funding before reaching out to this new method. Let others work the kinks out of the crowdfunding system before you put your business at risk.