Want to support a startup? be a startup? Research Crowdfunding first

Crowdfunding has emerged as an innovative way to get a business off the ground. Taking advantage of the Internet and social media, crowdfunding allows businesses to gather resources from people who want to help fund a startup.

Most crowdfunding projects seek contributions from people who think they have a great idea for a company, invention or project – but those who contribute won’t actually become part owners. Instead they may receive mention of their support or a gift, such as a T-shirt.

ID-100183758The 2012 Jumpstart Our Business Startups (JOBS) Act was designed to make it easier for startups to find investors – who will own equity in the new business – through crowdfunding.

The concept comes with advantages as well as potential pitfalls. For the creator, there is a risk that details posted online could be copied. For the small time investor, there is a potential for fraud.

Kickstarter recently canceled a project that it determined was a fake startup (Kobe Red – 100% Japanese Beer Fed Kobe Beef Jerky) just days before cash was to be released.

If you would like to give to a crowdfunding project, BBB has the following recommendations:

  • Investigate before you give. Find out what you can about the entrepreneur, artist or charity and see if it looks legitimate. Are there details on Facebook or other social media? Do they offer links for further verification?
  • Ask questions. Don’t be afraid to request information from the startup before you decide to pledge.
  • Budget your investment. Don’t give money you can’t afford to lose.
  • Don’t count on a deduction unless it’s a non-profit. Contributions to a crowdfunded charitable cause are not tax deductible unless the group receiving the funds is a 501 (c)(3) organization.
  • Report suspicious accounts. If you see a suspicious account on a crowdfunding site, report it. Supply as much detail as you can.

The U.S. Small Business Administration has a few tips for entrepreneurs who are interested in using crowdfunding:

  • Understand your commitment. Have a careful strategy, perfect your pitch to ensure it connects with your target investors.
  • Have resources to promote your pitch. Maintain momentum by being responsive to calls, emails and social media comments.
  • Find ways to create a buzz. Learn who your potential investors are and how to persuade them.
  • Be prepared for questions. Be ready to tell potential investors how you will spend the money, about your exit strategy, long- and short-term goals and what preparations you have in place.

1 Comment

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One response to “Want to support a startup? be a startup? Research Crowdfunding first

  1. Mark Burrows

    As entertaining as the concept sounds, I don’t care for crowdfunding. It is a high risk way to start up a business or a charity. Even with the best intentions you may not get off the ground. Returning the donated funds are near impossible and that is just going to leave a sour taste in the mouths of those who were exited about the project and pitched it.
    Then yes, it is a perfect venue for scam operators and con artists to ply their talents to. They could just as easily start legitimate projects then back out or disappear at the last minute. Never mind the fake ones.
    If you want to start a business, you have to do it the old fashioned way. Do something else for a while, save some money and borrow the rest. It is up to you and your confidence to succeed, pay off the loan, and grow.
    Overnight success is more fairytale than reality. Yes it has happened, and it gets glorified by the media and Hollywood, but they do not tell of the failures who reach for the brass ring for instant wealth and fall into misery. They also do not tell the stories of the people who work hard and build their business the hard way having to stretch their budget until they clear their debts and in the same time managed to make a name for themselves.
    I would never support anyone looking for a quick way to get a start. If I was a person of financial wiles and wealth, and I saw a good idea, I would take in under my wing as an investment, making sure that I always owned a piece of it. I would not allow the creator of the business to go public and sell the business as shares to stockholders, leaving only myself as the only percentage owner and the one with first option for buyout. But, I am not a wealthy man who dabbles in finances, but I could have been. I just took a different road in life.

    Mark Burrows

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