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Small Business

Financing Your Business

Crowdfunding: A New Source of Investment for Your Business

From the $433 million raised this year by the co-working space startup WeWork to borrowing a few hundred dollars from the bank of mom and dad, securing cash to build your business might seem like an insurmountable obstacle. But the recent growth of crowdfunding is giving some business owners a new way to finance big dreams.

Crowdfunding platforms help businesses, nonprofits and individuals raise money by sharing a story and inviting people to invest. They take two forms.

One is rewards-based (like Kickstarter, Indiegogo, Razoo, and others), giving the donor a perk or a product in exchange for an investment. The fundraising campaign usually offers a product before it hits the market, and in doing so helps get the item to the manufacturing stage because each investor represents an advance order.

The other type of platform is return-based (like Prosper or Lending Club), with contributors getting a financial return from interest payments, equity, or profit sharing in exchange for the funding they provide.

A Startup's Bumpy Road

For Frank Yao, cofounder of Physiclo, “a high-traffic crowdfunding site is perfect for a technology or product-oriented startup."

To date, Indiegogo has hosted more than 300,000 campaigns and operates in 224 countries and territories. About 7,000 campaigns are active on Indiegogo at any given time, according to the company.

Yao says that when he and his cofounders were ready to launch their “smart" athletic garments designed to boost workouts, the Indiegogo team helped with campaign strategy and management. But it wasn't easy. Yao says Physiclo “ran into a couple of bumps" along the way, including a big one when they received a cease-and-desist letter from another active wear company with a trademark somewhat similar to their old name.

“At the time, we didn't have the funds or resources to fight a trademark battle, so we were essentially forced to change our name," Yao says. “Not only did this eat up a lot of our time, but it's also a very confusing and awkward thing to have to change our name mid-campaign."

The Indiegogo team advised them on how to inform the backers who had already signed up and allowed them to extend their campaign an extra two weeks. Physiclo went on to exceed its funding goal and is now in production, with plans to ship its first products soon.

Working The Crowd

"The most common misconception people running crowdfunding campaigns make is that they can put their idea on Indiegogo without putting in any work and expect the crowd will simply fund them," says Indiegogo CEO Slava Rubin.

The platform requires sweat equity, too, says Rubin, including promoting the product via social media and seeking news media coverage. "Campaign owners also need to provide frequent updates on their campaign page," he says. “We've found that campaigns that add updates every five days or less raise 218 percent more than those that don't update as frequently."

On the return-based side, FundersClub puts startups in front of potential accredited venture investors they might not otherwise be able to reach. Not just any idea will pass muster, says founder Alex Mittal, but they often don't have to come up with the pitch deck that is often used to present a business to potential investors. “Our focus is on underlying facts, assumptions, and the opportunity, not an impressive slide deck," he says.

The vetting process is rigorous, even at the seed, or earliest stage, of investing. Mittal advises founders interested in using a return-based platform to make sure that they are at an appropriate stage of early fit between their product and the market.

“Product-market fit is a fancy way of saying customers or users really want and love your product or service, as demonstrated by key metrics," he says. Mittal adds that FundersClub is looking for businesses that can disrupt huge markets, so founders need to be sure the potential business is in a market large enough (perhaps in the multibillion dollar range) to be considered by a venture capital investor.

Mittal says FundersClub reviews thousands of businesses every year and has funded more than 150 startups since July 2012. “Make sure you know your business inside out and are focused on constantly tuning the right knobs that drive success," he says.

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