For many young entrepreneurs, landing startup funding is next to impossible. Banks won’t generally look at you unless you have two years of financials, and investors want to see serious traction before they’ll sign on. So what’s a young trep to do?
Enter, crowdfunding. Traditionally, donation based platforms like Kickstarter allow entrepreneurs to appeal to people at large for the capital necessary to start a project or product. In return, funders often receive tangible rewards like a T-shirt, product sample or VIP status.
That model is set to change, however. Last year, the Jumpstart Our Business Startups Act, or JOBS Act, became the law of the land. One of the most anticipated measures in the law gives entrepreneurs the ability to sell a financial stake in their companies to anyone, regardless of whether they’re accredited investors.
Though the law hasn’t yet kicked in, to the chagrin of many in the crowdfunding community, getting familiar with the JOBS Act now is something all entrepreneurs should do. Here are four things to know:
1. A good story will remain paramount. Though many of the law’s details are still unknown, entrepreneurs will be able to publicly post information about their business on “funding portals” and accept actual investments from people across the country. This won’t amount to a guaranteed funding source, however. Fundraising success will still depend on the entrepreneur’s ability to engage potential investors in a compelling way.
Posting a fundraising campaign is only the first step in the process. You have to engage your networks to rally around your business. You need to drive them to spread the word for your campaign. You need to tell a story that connects with potential funders in a way that compels them to want to get involved. It may feel laborious, but the success of any fundraising campaign — whether you’re raising capital for your business or your favorite charity -- is a direct result of the effort you put into it.
2. Appeal to local investors. Say you own a coffee shop and you want to expand operations with a new industrial oven so you can offer food. Crowdfunding with local investors could be a great approach. Think about it: If you can get 20 locals to crowdfund your expansion, you’ve created a pool of customers who don’t just like you’re shop but are invested in its success. Surely they’ll pass up the chain stores for your shop any day. They want to earn a financial return as your business grows.
Related: Shaping Crowdfunding 2.0
3. Get the full picture. Despite the upsides, publicly soliciting investments isn’t a fit for all businesses. Consider what you’ll likely have to share: business financials, personal information, projections. Some entrepreneurs are thoroughly comfortable sharing that sort of information with their networks and beyond. Others aren’t so sharing. The main thing to remember is that committing to crowdfunding means you’ll have to open yourself and your business up for evaluation -- and, one day, possibly fork over equity.
4. Consider ancillary benefits. Sure, the crux of crowdfunding is, well, funding. But it’s also something more. We’ve seen lots of young businesses tap the networks of the crowd. An investor leads to an introduction to an advisor or a new hire. Media relevant to your business takes an interest in your crowdfunding experience and winds up doing a story about you. Someone always knows someone who knows someone that can help you out somehow. The “secondary” effects of crowdfunding are worth considering, as you pursue funding.
What aspect of the JOBS Act is most perplexing to you? Let us know what and why in the comments below.
The author is an Entrepreneur contributor. The opinions expressed are those of the writer.