September 4, 2011
A crowd funding business is typically established as a paid membership club. In order to become a member of the crowd for the business, clients must pay a fee to join the club. Once they are in the crowd they can accumulate points which allow them to get products at discount or free. This is the benefit for joining, since there are no cash rewards. The crowd may also have the right to vote on business decisions which gives them some control over the business.
For a start-up business, the crowd is basically a club of fans or business supporters. In order to offer this type of equity the business is required to file with the Securities and Exchange Commission, or SEC. This is a complicated and exhausting process that few businesses want to go through. So why do so many do it?
The Crowd Funding Advantage
There is one clear advantage to using a crowd funding model for a start-up: direct communication with the financial supporters of the business. The middleman is eliminated and there is no confusion over who is investing in the company and who is just contributing as a basic supporter or fan.
The relationship between the business owner and those financially supporting the company is completely different when crowd funding is used properly. There are no certificates of stock and directors do not need to be appointed. Equity is never paid out to the crowd.
Members of the crowd financially contribute to the company for products rather than equity.
A new business owner keeps all of the company within their ownership yet is able to secure the money needed to make the business a success in the short and long term. This advantage is why so many start-ups are willing to go through that long filing process with the SEC.
Crowd Funding Online
The fastest and most common way for a start-up to use crowd funding to secure the money they need is to set up their own membership website. Those who join become a part of the crowd and collect some type of points which can then be used to obtain goods. The site has to offer something that members want to sign up and work toward securing in order for this to work.
Some ideas for rewards the crowd can earn include:
- Computer Software
- Newsletters or Ezine Membership
These are just a few ideas, but any type of corporate gift would be acceptable. There could be items of lower value that are easier to obtain along with more expensive items that take longer to obtain.
It is much easier for a start-up business with no connection to offline investors to secure crowd funding online. The Internet gives direct access to people from around the world who may be interested in investing in order to receive product from the business. Every contributor can see the terms of the agreement through the website before deciding to join. This is much faster and easier than trying to secure an offline connection with an investor that is strong enough to secure the funding needed.
The large audience that can be targeted online is what makes crowd funding through a website so easy. The products given away to the crowd can be secured at low prices, so it pays off in the end.
Crowd Sourcing vs. Start-Up Loans
Most people who get a great idea for a new business will come up with a detailed plan and present it to a lender in attempt to secure a start-up loan. There is a lot of risk in these agreements, both for the lender and the new business owner. Despite the risk, these loans have are considered the natural way of securing funding for a new business. Many will take out these loans without even realizing the risk involved.
The risk is in the gambling on an unproven company. If the business takes off and is an instant success then everything turns out okay, but that doesn’t happen for all businesses. Some new business owners find themselves with a business that is going nowhere and more debt than they can handle. Their future holds insolvency and potential bankruptcy.
Cutting Out the Loan
It’s clear that most new businesses will need some type of funding if they are to have a chance at long term success. The trick is to remove the start-up loan from the business plan and put in crowd funding instead. Suddenly the plan looks very different because there is a way to get the required funding without the risk of taking out a loan. The crowd offers funding without demanding repayment. They are happy just to accept the product that you offer for their membership or accumulation of points.
There is no emotional connection between the business owner and members of the crowd. You remove those emotional connections for a hassle-free funding arrangement.
A start-up loan offers fast money to get a business going, but crowd funding can turn into a long term investment strategy that helps the company with ongoing expenses. It presents an opportunity for future funding as well as start-up funding.
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