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How Crowdfunding Can Help Startups To Survive

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crowdfundingBesides obvious benefits of offering alternative source of financing to small businesses, crowdfunding has one side benefit that may be just as important as funding itself. I am talking about organization and accountability of a business that decided to take crowdfunding route. 

Lets compare two similar start-ups: ABC company is funded exclusively by the owner and XYZ company funded through crowdfunding. We are talking about very small companies, with start-up capital of under $100,000. About 85% of all business start-ups fall under this category.

 

ABC owner is a classic entrepreneur type, doesn't have a clear vision where she is going, or business plan, or financial projections, or sales and marketing strategy. She basically has nothing but enthusiasm and entrepreneurial spirit. Such startups are the main reason for 60-75% of small businesses to fail within first five years. Moreover, ABC owner is not reporting to anyone and in many instances doesn't ask for advice or hire a professional consultant to help with business organization.

On the other hand, XYZ owner prior to even getting money from the crowd has to prepare a business plan, financial projections, securities disclosure document and sound solicitation to attract prospective investors. Such preparation on its own is helping with organizing thoughts and allows to play the entire business operation on paper prior to spending real money. I am pretty sure that while preparing the documentation the owner will discover many things about the future business that otherwise would be overlooked, and many costly mistakes will be avoided. In addition, prior to investing, most investors will ask questions - many questions - about the future operation. They want to understand the reasoning for this business to exist and for them to invest money in it.

Now, lets take closer look at the crowdfunding situation. The owner isn't just getting money from people, she is getting multiple partners in the business - passive investors - people who have shares of XYZ company. Most likely they are silent partners and don't have a say in how to run the business, however they can ask questions if they feel something goes wrong. How do they know that something is going wrong? Because, most likely, XYZ company has to at least provide all shareholders with monthly financial statements. It makes a lot of sense. If I invested money in XYZ, I want to know how they are doing. Most likely, a formal board of directors will be formed, overseeing and advising the owner. Such organizational structure and reporting on its own is very beneficial to a business. Although it will add more work to the owner, there's much greater chance for such business to succeed.

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Guest Thursday, 30 October 2014