crowd funding

Q. Have you used crowdfunding sites to raise money for a business project. Asked on LinkedIn by Brandon Schaefer

I see potential problems with doing this. A business project is meant to make a profit, and earn a return for the investors. If the investors are crowdfunders, how do they ever benefit other than feeling good about supporting a business they like?

I see four ways to view such a contribution:

1. It’s a gift. I don’t expect to get it back. I’m giving it to you because I believe in what you’re doing.

2. It’s a loan, with no recourse. If you do well, I’d like my money back, with interest. If you go belly up, so be it.

3. It’s prepayment for services. I’ll put money into your business in the expectation that when you get going, you’ll provide me with product or services of comparable value. Perhaps a plaque with my name on one of your cafe tables.

4. It’s an equity investment. I expect to own a piece of your business, have a share of the profits as dividends, and to benefit on the upside if you sell it later at a premium. I want oversight on how you’re running the business.

If I’m a crowdfunder for you, several things would really irritate me, perhaps to the point of lawsuits:

1. You squander the money, just out of lousy planning and management

2. You divert the money to other uses, such as fancy offices or expensive travel

3. You make a bundle and ignore me. With my $1k investment (among others) you grow your company and Google buys you out, making you rich, then you won’t take my phone calls.

How are these potential situations handled on crowdfunding sites? What are the obligations of the person receiving the funds? What are the rights and recourse of the contributors? This is why we have contracts. The crowdfunding deals I’ve heard of sound kind of loosey goosey.  Fuzzy agreements now = lawsuits later.

If it’s for a good cause–say, you’re raising money to go plant trees to restore the rain forest–then I view my contribution as a gift, and expect nothing back.

But if I’m investing in a business that expects to make a profit, then I want some contractual accountability.

So when you look at Crowdfunding sites, see how they address all these questions and others

 

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My wife needs financial help to restart her handmade soap business, hopefully a grant. We have the building, need to upgrade computer and software, get raw materials, build a web presence. Asked by Scott Coe on LinkedIn.

MVH: My first question: do people and stores want to buy her soaps? If so, can she hand-make some samples? Could she use the samples to make some sales, collect some deposits, then use that money to buy more raw materials and make the soap that was ordered? If she prices properly, she should have enough gross profit to buy the next batch of ingredients and make more soap.

This is customer financing and it’s not that unusual. It requires having buyers who believe in your products. But people may be more willing to do this than to loan or give her money.

This is pure bootstrapping, and you don’t want to do this if you can raise capital in any other way.

You didn’t say how much you need to raise, and that makes a big difference. But if you can’t even afford some raw materials, it seems premature to worry about upgrading your computer and software. Use pencil and paper. Spend no overhead before its time!

Websites can be put up very inexpensively–free here on WordPress, plus hosting for less than $100 per year. It just takes time and gumption. Or spend a few hundred on a virtual assistant to do the initial set up. Most internet and web things are time-intensive, not money-intensive, but hiring a dollop of skill helps a lot.

The more capital you raise, the faster you can grow.

The more you can demonstrate demand, the easier it is to attract capital.

So hit the pavement and make sales.

I’ve never seen anybody get enough money from a grant to launch a viable business. Just enough to go broke.

The likely sources of financing for this venture:

— Your own savings

— 2nd mortgage on your house

— Family, even though it’s very risky even asking them

— A bank loan with a personal guarantee

— A private backer who strongly believes in her skills and concept

A product like this might be a candidate for crowd funding. Google this.

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