When raising money for your company via crowdfunding, you should think carefully about what product or service you have to offer and what type of public will be more attracted to your offering.
First, you should keep in mind that while equity crowdfunding is suitable for virtually any type of business, traditional crowdfunding is suitable only for those businesses that have a product or service to offer to a broad, nationwide audience. It’s hard to offer dinner or drinks at a local restaurant via crowdfunding for example. But a tech startup has more choices.
So, let’s analyze the advantages and disadvantages of each model:
- You are the sole owner of the company. You don’t need to distribute equity to third parties, retaining full control over your business. If you are successful, you can sell it later for a large sum, like Oculus Rift, who raised $2.5 million and then sold for $2 billion to Facebook
- You can test market acceptance prior to giving up a part of the company. You don’t run the risk of disappointing your investors nor the risk of selling equity for a price much lower than you could get after you are successful
- You can have resources to improve your company before taking your business to market
- You are on your own. You have to design your processes all by yourself and deal with potential failures without a professional guidance
- You won’t have a backup if you must make adjustments to your product or service after you get the money
- Crowdfunding is limited to nationwide products or services
- You have to pay sales tax and income tax based on your profits
- You can crowdfund a local venue, such as an apartment building, a bar, a restaurant, etc.
- You can reach out to investors to contribute their expertise. You can make that condition part of your pitch
- You can raise enough funds so that your product or service can be planned carefully, instead of putting it to market for a price that may reveal irrealistic
- It is easier to terminate the project if you can’t deliver your promises, sharing the loss among investors without going bankrupt yourself
- There is no sales nor profit made by crowdfunding. So, you don’t owe income or sales tax right away
- You give away part of your business too quickly. Your bargain power is much reduced
- You can be in deep debt if your product or service is not successful and your backers decide they want their money back
- You have to sort accredited and non accredited investors carefully and issue periodic reports on your activities
Analyzing which type of crowdfunding suits best for your company depends on the analysis of how local your business is and how defined is your product or service.
Giving up equity can be good for many startups, not only for real estate enterprises. You should consider the cost of issuing periodic reports and the cost of taxes in order to decide which is best for your business.