Your Top 5 Crowdfunding Questions Answered A crowdfunding expert answers the most frequently asked questions about this new way of raising startup funds for your business.
By Sally Outlaw Edited by Dan Bova
Opinions expressed by Entrepreneur contributors are their own.
In her book Cash From the Crowd, Sally Outlaw, founder and CEO of crowdfunding website peerbackers, reveals the secrets of funding your business with help from colleagues, peers, family, friends and even perfect strangers through a crowdfunding campaign. In this edited excerpt, the author shares her answers to the questions she hears most often about raising funds through a crowdfunding campaign.
As the founder of a crowdfunding website, I get a lot of general inquiries from users. Here are the top five questions which apply broadly to most campaigns.
1. Can I run a campaign simultaneously on more than one crowdfunding platform?
While most websites don't prohibit you from posting to more than one funding platform at a time, posting on multiple sites can hurt your campaign. The biggest problem is lost momentum, because backers like to see you approaching your financial goal. If a project is posted to more than one website, campaign momentum is diluted as contributors are split among multiple platforms. And, of course, if you're on an "all or nothing" crowdfunding website, you have a bigger chance of not reaching your goal and therefore losing all the funding you do attract.
It can also be confusing for backers and press if you're on more than one platform. To which website are you sending them to learn about and support your project? Better to rally all the social media and hard-earned press exposure around one fundraising initiative. Also, you probably understand the amount of work that will go into promoting, maintaining and updating your campaign while you're fundraising. Refreshing your content, providing updates, adding new videos and perhaps even new rewards all contribute to a successful raise. Given this, how many websites would you really like to manage on a daily basis?
It's better to invest your time preparing, planning for and promoting one robust campaign. Running more than one campaign simply reduces your effectiveness without expanding your reach.
Related: How the Crowdfunding Site Peerbackers Got Its Start
2. Do I have to be a legal entity to post and raise funds?
The answer to this is yes and no. If you are crowdfunding using either donation or reward models, then you don't technically have to be incorporated as a legal entity. These can be good avenues for testing out an idea. However, you would need to be a legal organization to participate in equity and lending crowdfunding. The exception: You could seek a loan on a lending site such as Prosper.com or Lending Club as an individual and then perhaps use the proceeds for a business purpose.
3. Can I crowdfund if I want to keep my not-yet-patented product/invention confidential?
First, if you have any concerns over this issue, apply for at least a provisional patent before running a crowdfunding campaign. Depending on the product, however, you may be able post a campaign without divulging the unique aspects you want to protect, meaning you don't have to post detailed renderings of your invention. You can address your product's benefits and what problems it solves, without revealing the design details of how you'll accomplish this.
4. Why do crowdfunding sites screen the projects they post?
Not all crowdfunding platforms screen the projects that get submitted, but most do. On donation and rewards sites, projects are reviewed primarily to ensure they meet the platform's guidelines and are a fit for that particular site, not as a mechanism to evaluate the worthiness of the idea. My company, peerbackers, for example, wants to ensure you bring some social media channels and a basic understanding of what it takes to crowdfund. Personally, I'd rather post on a website that reviews and curates its offerings so I know my project will be in good company.
Under the current model of equity crowdfunding, companies need to screen for ventures that will meet investors' expectations -- such as a strong team and marketplace traction -- and usually only a very small percentage of submissions are approved to post.
5. Do platforms charge upfront fees in addition to the success fee on funds raised?
I'm not aware of any reward-based platforms serving entrepreneurs that charge an upfront or posting fee, though some donor sites like Crowdrise charge a monthly and transaction fee, depending on some premium features. Remember that it may take some out-of-pocket costs, such as creating a quality video production, to make your campaign great.
