Crowdfunding is understandably a hot topic these days. From the steady stream of new platforms launching to Kickstarter's latest success story, there's no lack of conversation around the fundraising platform that asks a bunch of strangers to kick in a typically small amount of money toward launching a special project or company.
So far, the donation-based model -- al la Indiegogo and Kickstarter -- has been the only option for entrepreneurs looking to crowdfund from anyone with some extra cash on hand. But pretty soon your options may expand, as there are rumblings of a new breed of "crowdinvesting" sites on the horizon.
That's if the Securities and Exchange Commission ever gets around to solidifying its rules surrounding the Jumpstart Our Business Startup Act, or JOBS Act, an initiative focusing on supporting small businesses by easing regulations. One measure involves loosening the reins on crowdfunding.
This is where the crowdinvesting sites come in. Passage of the JOBS Act allows for a new breed of crowdfunding sites: those allowing anyone, not just wealthy accredited investors, to fund a private company in exchange for some degree of ownership or possibly a financial return. Crowdfunding sites that sprout up will likely have three different investment focuses: equity, debt and revenue.
And if you aren't interested in holding your breath until the JOBS Act actually goes into effect, keep in mind that all of these investment-centric crowdfunding platforms are already available to entrepreneurs. Check out the major three focuses below:
Similar to an angel investment, equity-based platforms give people a stake in a company in return for funding. You can directly connect to investors through sites like Crowdcube. Another option is to look into crowdfunding sites that act as a managerial or advisory intermediary betweenindividual investors and the company raising funds. It looks more like a traditional VC fund and FundersClub is a key player in this space. While this can be great way for new companies to get exposure in front of investors, keep in mind you could be giving up equity and control.
A second model uses debt to fund a startup. Lending Club is one crowdfunding platform out there using this structure. Taking on debt, which is a financial instrument that acts like a loan, can be powerful, as it allows entrepreneurs to retain ownership oftheir business while also accessing capital and creating liquidity for the investor. Yet, being required to make mandatory principle and interest payments could create issues for a growing and possibly volatile business.
Lastly, you have the option of revenue sharing on sites like Bolstr, where an investor's payback is tied to how much revenue the business makes. The key here is that an investor's and entrepreneur's expectations and motivations must be aligned for a successful venture.
If your return on investment is revenue-based, the better the business does, the better the investors do. And that creates loyalty and motivation for investors to spread the word. Yet, like the equity model, you do have to forgo some of your earnings in exchange for funding. This option is well-suited for low-growth small businesses, likebrick and mortar.
When looking for outside financing through crowdfunding, what advice do you have for young entrepreneurs? Let us know in the comments below.