Home / News / Crowdfunding could take the place of a bank loan for some businesses

Crowdfunding could take the place of a bank loan for some businesses

Convincing many strangers to fund your business may be more effective than convincing one loan officer

Megabots' Iron Glory robot is demonstrated in 2015 at Maker Faire in San Mateo, California (Megabots photo)

Megabots’ Iron Glory robot is demonstrated in 2015 at Maker Faire in San Mateo, California (Megabots photo)

Internet-based crowdfunding has changed the landscape for startup businesses.

What was once seen as either an online basis of donations, an electronic “tip jar,” or a means of throwing a few dollars at a silly Internet stunt has become a legitimate tool for helping to get new startups off the ground.

Instead of convincing the a handful of strangers at your local bank branch to write one big loan check, some businesses are asking hundreds of thousands of strangers to support their concepts with smaller amounts. The reach of platforms such as Kickstarter, GoFundMe, and others, to millions of users, makes this funding route appealing for these businesses.

Convincing the masses takes an approach that usually includes filming a short video introducing your business idea or product, presenting the upsides of funding it, and offering reward tiers such as prizes for different funding levels, the possibility of equity, and first dibs at the company’s product once it hits the market. It’s also a good idea for businesses to present a business plan and a clear logic and path towards profitability to convince strangers to fund them.

In the case of Matt Oehrlein, co-founder of MegaBots (www.megabots.com), his goal was to use crowdfunding to help bring the world’s first giant robot fighting league to life. MegaBots was initially funded with $200,000 from an angel investor. The company later turned to Kickstarter, raising more than half a million dollars to help fund the creation of its Mark II robot, which fought and defeated the Japanese Kuratas robot in 2017. The company later raised another $3.85 million and $2.5 million in venture capital investment rounds and is still going strong.

“From a business perspective, crowdfunding is mostly the same thing as taking pre-orders, which businesses have been doing for a long time,” Oehrlein said. “I think what modern crowdfunding adds on top of pre-orders is it helps build a community and a narrative around product launches. Customers now feel like they’re part of a mission.”

Backers who funded the Mark II robot don’t get their own giant robot. The rewards the company offered put them in the merchandise, digital download and live event businesses. For $10, a backer would get a sticker. For $5,000, a backer could control the giant robot to smash a car.

Internet-based crowdfunding also helped connect his company and its efforts with its potential audience, Oehrlein said.

“The pros to this are obvious, you build a stronger relationship with your early adopters because they have something to point to as that start of their involvement,” he said. “The cons are, if you fail, your public failure is on display forever, at least on the Kickstarter platform.

“It’s big, but not insane when compared to other funding mechanisms like debt or venture capital which are orders of magnitude larger,” Oehrlein said.

It’s also possible to use crowdfunding to sell financial assets. Called regulation crowdfunding by the Securities and Exchange Commission, the rules allow for raising up to $1.07 million in a 12-month period.

“I would like to see more equity crowdfunding happening,” Oehrlein said. “The fees are pretty high and the investments are pretty limited. I’d like to see these laws loosened up a bit to allow more average people to participate more in the investment process.”

Businesses considering crowdfunding can research which platforms they would like to use, look at some of the most successful campaigns, decide what to copy and what to do differently, and build a campaign from there.

Crowdfunding might not provide every dime your company will ever need for its first few years of operation, but it can provide the initial infusion that could get your idea off the ground, get it in front of the people who will want to buy your product, and help form a lasting relationship with this market. The people who love your product in the beginning are the ones who will often stand by it, especially if they’ve been a part of its funding from the start.

x

Check Also

open

Banks have programs to help small businesses through transitions

When a small business seeks advice from M&T Bank on selling, merging, or another kind of transition, it might discover that Eleni Monios has just the knack. “I have been personally a part of this from a very young age,” ...