Crowdfunding – a new shot at financing your business

When an entrepreneur enters a NYC Business Solutions Center with bags under their eyes and a business plan, I can bet that what they are looking for: FINANCING.   

Good news: there has been a shot of innovation in the arm of business financing. It is certainly not a cure-all for every financing ill, but it is enabling a few more entrepreneurs to get much needed sleep. 

What is this innovation I’m talking about? CROWDFUNDING.  

This is usually the point at which I get blank stares and quizzical looks from not only entrepreneurs but also many of our financing partners.

Crowdfunding has its roots in the entertainment industry and is just starting to bring real and tremendous value to other types of businesses.  So, let me clear some of the fog surrounding crowdfunding. 

Crowdfunding is basically a way to raise grassroots funds for your business without giving up any ownership or having to pay back any loans.

Sound too good to be true? Well it works, but only in the right situation and with a good amount of effort.

Crowdfunding uses online sites (such as Kickstarter or Rockethub) to raise funds for a clearly defined project. It relies on the entrepreneur to use social media and other means to get the word out about the campaign to all of their contacts and then touches the contacts of those contacts – somewhat like viral marketing.

In exchange for an individual’s contribution, the business sets up a system of rewards for the contributor.  

For example, someone trying to launch a new fashion line may promise sketches of a design for a $25 contribution, a dress straight from the designer for $200, and so on.

The scheme can work even better for an existing business that may want to expand. If an entrepreneur has a deli they can advertise their crowdfunding campaign to all of the existing patrons that already love the business through simple signage at the cash register. Perhaps the deli owner wants to buy a new cappuccino machine and needs more funding to do so. They can make promises of 10 cappuccinos for a $50 contribution or perhaps propose the option of naming a sandwich on the deli menu after the donor for a more sizeable amount. In the end, patrons feel as though they are more a part of their neighborhood deli; they get a place nearby to have great cappuccinos; and, they get the item promised for their contribution level as well. The business owner gets to buy the machine that will bring in additional revenue without having to take out a loan or give away equity for the item. It’s a win-win all around.

Of course like anything worthwhile, there is a considerable amount of work necessary to really make crowdfunding work. The entrepreneur has to get the ball rolling with the first contributions, relying on their own networks primarily. Nobody wants to make the first contribution to a project. The entrepreneur really needs to make sure the word gets out through whatever means are at their disposal.

Crowdfunding also works better for a clearly defined project. Claiming that you want to start a new marketing business and need startup funds generally does not really have the grab to get people on board. An entrepreneur needs to know how to sell the project and how to set realistic goals for the crowdfunding campaign. This usually works best when the parameters are clearly defined. For instance, needing $2,000 for supplies to make the first batch of your fabulous quiches, which you will sell at defined green markets in the city on set dates. Maybe in exchange for a certain level of contribution you will share one of your recipes!

Crowdfunding is a creative and viable option for a lot of businesses out there. But, more than anything, it is one more tool to help entrepreneurs realize their business dream. It might not bring in all the money necessary for a business, but it sure can bring in a helpful piece of the pie, and might even help that entrepreneur get some sleep.   

Visit the NYC Business Solutions website for more information on how we can help you access financing - with crowdfunding, traditional lenders, or alternative lenders. You can also register for our upcoming (2/9/2012) course on Crowdfunding.

Michelle Bhattacharyya is the Director of the NYC Business Solutions Centers in Upper Manhattan and Washington Heights. If you have a question or comment for Michelle, please drop her a note in the comment section below. And, please share her blog entry with your colleagues on Facebook and Twitter.