Crowdfunding: Choose Options Carefully | Business Town

Crowdfunding: Choose Options Carefully

Crowdfunding is cool, it’s hot, and it’s hip—but that doesn’t mean it’s necessarily for you!

As a rule of thumb, I don’t want any investors. I would prefer not to have lenders, either, but I’ll take them on if I need to. With crowdfunding, you can seek debt or equity financing.

But really, isn’t having one banker enough? Do you really want to have 10,000 bankers? Do you really want to have 10,000 complaining investors? Or suppose things are going well and your business is in the news—do you really need 10,000 investors who just want a “reasonable” few minutes of your time?

I can tell you from my experience in the book business, when we had up to 200 new authors a year, that when you have a number of people who assume that you are going to make them rich, they can make your life miserable. Every author we had assumed his or her book should be a best seller, and if it wasn’t, then the publisher was doing something wrong!

All investors assume that their choice of an investment in your company was a brilliant idea on their part; hence, they should get really rich! And if they don’t get rich—if your company doesn’t skyrocket to success—then you are doing something very, very wrong!

As a rule of thumb, if I have any lenders or investors, I want as few as possible. So, I would avoid this model like the plague. But, if I could get financing no other way, I would consider it.

I might also consider crowdfunding for a special situation, such as having investors who could really help spread the word and make a huge amount of difference in marketing my business—then maybe, just maybe, I would consider this model.

Is Debt Crowdfunding a Better Alternative?

Debt crowdfunding is where a third-party lending service, often Internet-based, aggregates potential individuals to lend money to businesses.

If you must use crowdfunding to finance your business, I believe you’re better off using debt crowdfunding than equity crowdfunding. This is because if the business is successful, your lenders will receive a clearly determined reward for investing in your business in terms of the interest rate on the loans.

On the other hand, equity investors who are sharing in your profits can always find something to complain, argue, or ultimately sue you over. For example, they might argue that you’re paying yourself too large a salary, or that your overhead expenses are too high, or that you accepted too low of a buy-out offer for the business.

What about Financing My Business through Product Sales?

Internet sites such as Kickstarter have popularized the idea of financing businesses and nonprofits indirectly by getting advance commitments in exchange for product. This is potentially a good alternative, because you’re not taking on equity partners or a heavy debt commitment. However, you are taking on a legal obligation to deliver a product as you represented it to your customers. So while it may be a good alternative, it’s not something you want to enter into lightly.

About Bob Adams

Bob Adams is a Harvard MBA serial entrepreneur. He has started over a dozen businesses including one that he launched with $1500 and sold for $40 million. He has written 17 books and created 52 online courses for entrepreneurs. Bob also founded BusinessTown, the go-to learning platform for starting and running a business.