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Securing Business Funding From Investors or Crowdfunding
Raising money for your business from investors and crowdfunding can be options if you're looking for cash to launch a start-up or take your business to the next level. There's a lot to consider when exploring these funding opportunities, starting with a basic understanding of how each of them works.
What to consider when securing money from an investor
With investor funding, money for your business can be provided in exchange for a share of ownership and/or future earnings. In this model your ownership is diluted, meaning you no longer own as much of the company as you did to start. For example, if you start a business yourself and no one else is involved, you own 100%. An investor taking a share of your company in exchange for their funding would bring your ownership to less than 100%.
Determine the investor's share of ownership
How much of a share of ownership an investor takes, and of which parts of your business, need to be determined before finalizing their investment in your company. Considerations often include the amount of money to be invested, as well as experience or other value the investor can offer. Keep in mind an investor can be another individual, a pool of individuals or another entity who may bring additional expertise and access to capital to your organization.
Know the value of your business to ensure you don't give away too much equity
When working with an investor, or anyone who might take an equity stake in your business, it's important to know the value of your business. Without knowing the value of your business, you may be giving away too much ownership in your business early, making it harder to offer more equity later for further investments. Be prepared to provide the business valuation, and supporting details of how you arrived at that value, to potential investors. Learn about four ways you can determine the value of your business.
Research your investor and their background
You've worked hard to get your business started, so make sure you gather key information on any investor who will have the ability to influence the next stage of growth for your company. Some qualifying questions you may want to ask a potential investor include:
- Can you provide me with a list and contacts for other companies you have invested in?
- How long do you typically work with companies?
- How many other companies are you working with right now?
- Is your investment just one-time seed funding or could it be ongoing in multiple rounds or a series of investment pitches?
- What is your level of interaction with the companies you invest in?
- Will I work directly with you or is there someone else on your team?
- What kind of support do you provide?
- What key metrics or standards are you using to measure the success of your investment?
Understanding crowdfunding as an option for your business
Crowdfunding is an increasingly popular source of start-up or next stage funding for newer businesses with the important distinction that the contributions do not have to be paid back as with traditional loans. Instead, you provide either equity or products/services in exchange for funding. This is reflected in the two ways you can approach crowdfunding for your business – an equity-based model and a rewards-based model.
What is an equity-based crowdfunding model?
An equity-based crowdfunding model is where you can seek individuals or entities online in a sort of marketplace experience and solicit investment in your business in exchange for an equity portion of your business. Online sites can vary between a sort of matchmaking service to allowing a formal funding to take place.
What is a rewards-based crowdfunding model?
A rewards-based crowdfunding model is where individuals donate money to help a company achieve a key milestone, such as a product launch or manufacturing milestone. The company has to obtain a set amount of online funding within a set period of time. If the full funds are not raised by the deadline, no funding will be secured in some cases. In some scenarios, the contributions are paid in exchange for the product or service. It's important to note that there are likely tax implications for the business owner regarding these contributions. However, they are not a debt obligation that needs to be repaid and you do not have to give up a portion of ownership.
How to have a successful crowdfunding campaign
Businesses can leverage a strong social media presence and high-quality content to drive more traffic to their crowdfunding site with the goal of maximizing contributions. When using crowdfunding, a processing fee may be charged for each contribution which could dilute the overall amount you earn. So, be sure to compare crowdfunding platforms, fees and rates before getting started. For both investor and crowdfunding models, the business owner should have a strong "pitchbook" or compelling reason why someone should invest in their business. This includes a strong value proposition and business plan.
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This article is based on information available in February 2021. It is for general informational purposes only. It is not intended to provide specific financial, investment, tax, legal, accounting, or other advice and should not be acted or relied upon without the advice of a professional advisor. A professional advisor will recommend action based on your personal circumstances and the most recent information available.