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First Time Crowdfunding? Here's What You Need to Know.

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In the book, Write Your Business Plan, the staff of Entrepreneur Media offer an in-depth understanding of what’s essential to any business plan, what’s appropriate for your venture and what it takes to ensure success. In this edited excerpt, the authors discuss what your business plan should look like if you're crowdfunding for your business.

A rather recent entry into the world of procuring funds for business projects is crowdfunding. This is a means of gathering funds from a diverse group of investors using Internet technology.

The idea is broad based with some investors on crowdfunding sites getting rewards for investing money while others become investors with a stake in the business. As a result, some of these sites are, like PBS, seeking support from generous people with a passion for a type of business or short-term project or for a cause behind that business or project.  Other sites are looking for investors in more full-blown, long-term business ventures. 

Massolution, a research firm that specializes in crowdfunding, reports that the overall industry raised more than $2.7 billion in 2012, across more than 1 million individual campaigns globally and then went on to top that mark in 2013.

Sir Richard Branson, who has invested in the crowdfunding platform Indiegogo, once told The Telegraph, a UK-based newspaper, that he would have used crowdfunding to start his Virgin empire if it had existed in the 1960s.

Adam Chapnick, former head of Indiegogo, notes that an abbreviated business plan works best for most crowdfunding sites. “Make a big fat business plan—then throw it away,” says Chapnick, adding that it's important to go through the process of creating a business plan and then it's necessary to simplify it to make it quick to convey for crowdfunding.

Another crowdfunding site, MicroVentures Marketplace Inc., starts off with a snapshot questionnaire to which you can attach a business plan if you so choose, but it’s not required. Like Indiegogo, it also wants to see the abridged version of your longer plan.

There are more crowdfunding services coming of age, with new parameters and guidelines, many of which meet specific niche groups. Rules are changing, in part because of federal and SEC regulations and in part because the crowdfunding services are seeing new ways of doing business. For example, Kickstarter, the early trendsetter in this industry, which has raised more than $300 million dollars for over 1,800 projects, will give the new business venture the money that's been raised only if the total amount requested has been reached. Therefore, if you request $10,000 to start a business and you raise only $7,500 from interested parties, you get nothing. Other services, though, would give you the $7,500. Kickstarter is also more selective about what projects end up on its website, looking for more “trendy” ideas to keep the company in the limelight.

By reviewing the various crowdfunding websites, you can determine which one might be best for your efforts. Look at what the investors will get in return. This can be anything from a gift, not unlike pledging money to PBS, a return on the investment with interest, or, on equity investment crowdfunding websites, a share in the business.

Also keep in mind that many people invest in crowdfunding ventures with their hearts and/or emotions. It's a daring means of investing, but one that drives many crowdfunding investors to put money into something in which they personally believe, such as an environmentally sound business.

Of course there are downsides to crowdfunding, such as putting an idea out there that can be easily stolen or having backers that offer money only while not giving you either the network you need, good business advice or second rounds of funding. There's also a lot of time spent on marketing to raise your funds. In addition, the SEC is closely watching this new investment opportunity, so you need to be abreast of the latest rules governing crowdfunding.

While Kickstarter and Indiegogo are more frequently used for creative projects, business owners have found success with Crowdfunder, AngelList, MicroVentures or CircleUp. But there are so many more that you can find by googling “crowdfunding for business.”

Edition: December 2016

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