Crowdfunding and Other Growth Funding Options

When actor LeVar Burton wanted to introduce his old series, Reading Rainbow, to new audiences of young children and their families, he turned to Kickstarter for help. The goal he hoped to reach over 35 days: $1 million.

He reached that goal before the first day was done, and the amount doubled on the second day. The campaign then set a new “stretch” goal of $5 million.

Such success highlights the power of not only Kickstarter, but crowdfunding in general. And that power is being used not just to resurrect old television programs, but to support new businesses.

If you’re seeking financial support for your business, looking at growth funding is likely on your radar. To help, we’ve compiled an overview.

1. Crowdfunding

Crowdfunding is a new phenomenon enabled by the Internet and social media. It helps businesses raise money from the general public, who can invest small sums by way of equity, loan or in exchange for benefits in the form of goods and services. “Crowdfunding is becoming an increasingly popular method of raising capital for small businesses,” said Tony Curtis, principal at Rehmann. “Just be sure you’re paying close attention to the rules and regulations, as there can be legal implications for not following them properly.”

Value crowdfunding is a subset of crowdfunding that is increasing in popularity. Startups use crowdfunding portals to raise money, but they’re not selling shares.

Instead, they sell products. For example, a craft brewery might sell memberships, growlers or t-shirts. “Value crowdfunding is attractive to organizations because there’s a real opportunity to create brand awareness,” said John Pridnia, principal at Rehmann. “Now they can go to angel investors and show not just how much revenue they’ve generated, but how much buzz is surrounding the organization as well.”

2. Friends, family or “fools”

Many businesses start with funding from the 3Fs — also known as friends, family or “fools.” The latter may sound a bit harsh, but refers to the less sophisticated private investor willing to take a risk on a new business idea. The 3Fs will almost always be the cheapest and easiest route to gaining early-stage funding, with easy equity terms or loans made on a low interest or even interest-free basis.

3. Accelerators and incubators

Accelerators and incubators, as the names suggest, are focused on helping startups grow their business quickly. As well as shared office space, these organizations will normally offer strategic business advice and mentoring services. The slight distinction between them is usually when it comes to funding. Accelerators will typically take growth businesses from concept to product, providing them with early-stage funding and mentoring, in return for equity. Incubators, on the other hand, will provide guidance on accessing financing but rarely fund businesses directly.

4. Business angels

Angel investors tend to dominate the lower- or early- stage end of the private equity market, usually investing anywhere from about $150,000 to $2,000,000 of their own money. In return for their investment —and often their professional know-how and expertise — they’ll almost certainly be looking for shares in the business. Business angels will often demand less formal terms than institutional investors and can be incentivized through beneficial tax relief available in about half of the states.

5. Angel networks and investor clubs

There are a number of angel networks and investor clubs. These typically bring together groups of business angels, with varying degrees of formality.

6. Venture capital

Venture capital is normally provided to early stage businesses with high-growth potential — usually after the business has been established but before it has achieved scale. Venture capital investments are therefore high risk, but can carry the potential for high rewards. For a business looking to grow fast and boldly, and needing a significant cash injection (smaller venture capital firms will rarely want to invest less than about $1.5 million), this might be the way to go, although smaller investments are increasingly being made in the technology area. More mature, established businesses may wish to consider private equity investment for expansion.

7. Corporates

Corporate venturing involves a larger company providing finance and resources to a smaller business, in return for equity. This route can make growing businesses appear more robust and scalable, giving them instant credibility. It can also offer the flexibility of a small business combined with the resources and connections of a larger organization.

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Want to learn more about how you can identify viable growth funding options for your business? Contact us today — we can help.