Crowd-Sourcing Your Small Business: The Good, The Bad, and The Prestige

In the height of the economic slump, crowd-sourcing was made popular. With big promises of big money without the high interest rates of traditional loans, crowd-sourcing became a beacon for entrepreneurs everywhere. Here is how it works: crowd-sourcing allows a company or an individual to raise capitol for a business idea through small contributions from a lot of individuals usually via an internet site such as Kickstarter, Go Fund Me, or Indiegogo. We’ve all seen the listings; a hopeful entrepreneur posts a description of their idea or business plan. They outline the service or product (hopefully with reference to a prototype) and set contribution goals with corresponding gifts. If you give me $1, thank you. If you give me $10,000, then I’ll fly to your house and kiss your feet. But how well does it work?

In April 2012, Obama signed the Jumpstart Our Business Act (JOBS Act) that sets guidelines for people using crowd-funding. The JOBS Act says that start-ups can raise no more than 1 million dollars within the course of a year without registering with the SEC.  With legislature on the books, one might imagine that this crowd-funding thing is really popular. And it is. As of 2014, Kickstarter alone has raised over a billion dollars for crowd-sourcing projects; and those successfully funded small businesses have about a 50% success rate. However, like so many things, crowd-funding is neither all good or all bad. When deciding if crowd-funding is right to get your business off the ground, there are a few things to consider.

One thing to consider is the stigma that crowd-sourcing some businesses may bring. Some business, like doctors, may be cheapened by the fact that their start-up capitol was raised through crowd-funding. It brings to mind images of bad credit and wanting something for nothing. It is best to carefully consider the image you want your business to have. Controversy, in some cases, prestige can be acquired through starting up with a crowd-funding site. There is something alluring about surpassing your original goals, especially if it is by a large amount. It adds weight to your idea and the backing of so many individuals can act as its own good review.

Only flashy business plans may reach crowd-sourcing goals. Good ideas are not always exciting, and those small businesses who wish to accrue capitol through crowd-funding may find it difficult to reach their goals. It takes effort and time along with good salesmanship to raise money for even the best idea, and some of those may not make it into fruition simply because the hopeful entrepreneur lacks marketing skills. However, the reverse is also true, as good ideas (and even so bad ones) with a catchy campaign might find it almost easy to reach goals.

If anything is to be said about crowd-funding, it is that it can be an easy way for an entrepreneur that cannot get a loan for what ever reason, may be able to raise capitol without having to give up any equity in their business—thus allowing some individuals to be able to become small business owners who otherwise would not have had the opportunity.