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Whether it's through Kickstarter or an equity platform, startups that have launched a crowdfunding campaign show how effective it can be to raise money through small contributions from a large number of people. As the popularity of crowdfunding continues to grow, startups and small businesses will be able to take advantage of the various trends that emerge in this space in the coming years. Here are three to watch in 2015.
Crowdfunding will go mainstream. In years past, crowdfunding as a means of financing a business was a novelty, a rare exception to the traditional methods of bank loans, venture capital and borrowing money. Today, announcing your crowdfunding campaign is just as common as any of these other options, if not more so.
"Many major news organizations are now highlighting noteworthy campaigns," said Bill Clerico, CEO of WePay, a payment service provider for crowdfunding, marketplace and small business platforms. "That's not just good for the campaigns, but it also normalizes the behavior and leads to more people [giving to] crowdfunding [campaigns]."
Nonprofits will benefit more from crowdfunding. The nonprofit and charity sector has particularly benefited from the growth of crowdfunding.
"This entire industry is being disrupted with the introduction of crowdfunding of donations," said Anisa Mirza, CEO and co-founder of charity crowdfunding platform Giveffect.
"Charities are seeing a twofold benefit from crowdfunding," Clerico added. "First, it's proven to be an extremely efficient way to solicit and manage donations compared with other methods. Second, the additional social and viral potentials of crowdfunding campaigns can give smaller charities a cost-effective way to create awareness for their cause."
Equity crowdfunding will grow (in states with crowdfunding exemptions). In 2012, Congress passed the Jumpstart Our Business Startups (JOBS) Act to bring equity crowdfunding to the forefront. A federal crowdfunding exemption under the JOBS Act is currently stalled, meaning that true, nationwide crowdfunding is not possible. However, Jonathan Wilson, an attorney at Taylor English Duma LLP, noted that about a dozen states have adopted their own in-state regulations for business crowdfunding.
"These intrastate offerings have had some success raising funds for real-estate projects, especially for construction financing and rehabilitation financing in deals where a bank loan would be difficult or not well-suited to the deal," Wilson said.
Gus Schmidt, attorney with Gunster law firm, noted that unless you're in a state with such crowdfunding rules, you can't truly take advantage of the proposed federal benefits of equity crowdfunding.
"Sites like GoFundMe and Kickstarter aren't true equity financing websites," Schmidt said. "You pre-sell products, and once the company gets up and running, the people who contributed will get the product. But they're not buying shares in the company. Once the SEC rolls out [a final] version of the JOBS Act, we'll see if it becomes something mainstream."
If you're hoping to launch a crowdfunding campaign in the New Year, you'll want to read the fine print on the platform or site you want to use. Not all crowdfunding platforms are created equal, and before you launch a campaign, you should know the ins and outs of each platform before you make your account.
"Truly understand the platform you are choosing," Mirza said. "From traditional crowdfunding venture firms like BrightSpark to platforms like AngelList, or even general platforms like Indiegogo and Kickstarter, there are a myriad of options. And chances are there is one that is better than others for your startup."
You'll also need a solid marketing plan to get your campaign off the ground.You may have a great idea that people are willing to fund, but if they don't know about it, you'll never see a dime of their money. Clerico reminded campaigners that crowdfunding is a challenging marketing exercise, and you need a strong, well-executed plan to raise the capital you require.
"Calculate how many people need to give at a specific amount to achieve your goal, and then devise a marketing plan to reach that many people," Clerico told Business News Daily. "Be sure to identify early champions, those who can rally their network to help you reach your goal. Reaching out to media outlets and blogs can help your campaign get distribution as well."
Wilson agreed, noting that, although communicating with potential investors is easier than ever before, you need an organized campaign to make it work.
"Campaigns fail that don't have their business plans fully baked before they launch," Wilson said. "Invest the time to complete a business plan and all of the related contracts before trying to tell [your] story through crowdfunding."
While crowdfunding may never fully replace traditional funding options, Clerico said that small businesses, especially those outside of the tech industry, will continue to benefit tremendously from this method of raising capital.
"Crowdfunding is here to stay," Clerico said. [According to the World Bank,] "by 2025, the global crowdfunding market potential could be between $90 billion and $96 billion. Crowdfunding will grow dramatically as a way to finance nontech businesses that have been traditionally financed by bank loans and friends and family. The opportunity here is enormous, and crowdfunding has barely scratched the surface of the small business financing opportunity."
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