How to Decide Whether to Crowdfund or Bootstrap Your Business How you chose to fund your business has a lot to with how much control you are willing to lose and how hard it is to explain your idea.
By Michael Georgiou Edited by Dan Bova
Opinions expressed by Entrepreneur contributors are their own.
Funding is the stumbling block for so many entrepreneurs. The bottom line isn't always pretty: No matter how amazing your idea or how passionate the people behind it, you'll need a certain amount of cash to get things going.
In today's competitive marketplace, many business leaders turn to crowdfunding to get started.
What is crowdfunding?
It's important to take a moment and define exactly what we're talking about. Crowdfunding is using small amounts of capital from a large number of investors in order to finance a project, business or cause. The whole idea of crowdfunding is tied closely to social media, as people use sites such as Facebook, LinkedIn and others to push out the message. Crowdfunding can attract large sums of money in relatively short amounts of time. Often, there are few -- if any -- strings attached to these dollars.
A key to crowdfunding is the notion that lots of small investors contribute those small amounts of money. In fact, the small amounts of money can seem impossibly small. Too small to make a big difference, actually. But the power of social media magnifies the impact as a thousand people give $5 each, for example.
Related: 10 Top Crowdfunding Websites
Who are your stakeholders?
There are three stakeholders in the crowdfunding process:
- The group seeking funding
- The investors putting up the cash
- The website that brings them together
That third party often gets little thought from businesses. When a company leader registers with one of the many crowdfunding websites that have popped up in the last several years, he or she signs a contract. The startup agrees to pay a percentage of its intake back to the host website. Some crowdfunding sites require contributions to reach a certain level in order for the project to receive support. In those cases, excess funds then revert back to contributors.
How does crowdfunding work?
Crowdfunding can take several forms. Each has the potential to meet the needs of different kinds of businesses. In donation crowdfunding, investors give to a cause while getting essentially nothing in return -- though prizes sometimes are given based on the amount contributed.
Equity crowdfunding does exactly what the name promises. In return for cash, each investor gains a piece of the company.
Peer-to-peer crowdfunding involves investors who expect monetary recompense once the company is up and running. This version is closest to the traditional investment model. The primary difference? Individuals, not banks or other lending institutions, put up the capital.
Top crowdfunding sites such as Kickstarter, Indiegogo and RocketHub offer a variety of crowdfunding models. Start looking, and you'll see dozens of other sites from which to choose.
What are the benefits of crowdfunding?
Businesses have some compelling reasons to open up to the possibilities crowdfunding presents. You've no doubt heard at least one incredible success story of a businesses that started this way. The massively popular game Exploding Kittens, Dash in-ear headphones and Oculus Rift virtual reality player all kicked off with crowdfunding help.
It's quick and relatively painless to begin a crowdfunding campaign. While the steps are simple, keep in mind you should take time to formulate a strategy and formulate your message before taking it live on the site.
Related: Crowdfunding and PR: Have You Thought This Through?
Crowdfunding also can move exceptionally fast. Most platforms put a 90-day cap on campaigns. Dollars can show up almost immediately, and money is ready to go just as quickly.
Running a crowdfunding campaign will help you develop savvy marketing skills that will serve you in the future. You can expand your marketing toolkit in a short amount of time and through a real-world trial.
Finally, crowdfunding builds your customer base even as you're still actively fundraising. It stands to reason that people interested enough to invest in your idea also will buy your product or service once your company hits its stride.
What is bootstrapping? What advantages does it offer?
Bootstrapping is basically the opposite of crowdfunding. Bootstrap entrepreneurs build their businesses from the ground up with little or no additional capital. It's been the path for decades of successful business owners, and with good reason.
Bootstrapping gives company founders ultimate control. They don't have to chase down potential investors or mold their business into something they don't want it to become.
Unlike crowdfunding, bootstrapping comes with no need for a ready-made product. This enables you to develop and grow your business at a comfortable pace you -- not investors -- set. Much of the crowdfunding world has an all-or-nothing nature that doesn't allow a business the time needed to gradually build its own image.
Bootstrapping is perfect for business-to-business (B2B) and complex ideas. The most successful crowdfunded companies are rooted in easy-to-explain concepts that appeal directly to consumers. If your venture will target other businesses or your ideas involve layers of meaning, bootstrapping is a much better fit.
Related: 3 Startup Fundamentals You Can Bootstrap When You Have No Money
Why did we choose to bootstrap our company?
After careful consideration, we at Imaginovation decided to bootstrap it. Our adventure has been not only successful but rewarding on a variety of levels. Plus, we're in good company with other bootstrappers, including Mailchimp, Braintree, and GitHub, to name just a few.
Crowdfunding has the potential to change the way entrepreneurs do business. Rather than creating a product with borrowed cash, crowdfunding gives businesses the opportunity to approach the process from another angle -- backward. And it does so with a wide net of support.
Weigh the benefits and the pitfalls for yourself and then ask the real question: Which is better for your business, the way you prefer to operate and what you hope to achieve? Crowdfunding often requires maintaining a strong and active social media presence, which can be bolstered with the help of a savvy digital marketing team. Bootstrappers often build their businesses on sweat equity, putting in long hours to make up for their lack of funding. If you commit to smart planning and hard work, both methods can yield good results.
