Crowdfunding is an excellent way to fund your business.
If you're looking for guidance from consumers and a platform to market your business, crowdfunding may prove an effective option for business funding. — Drazen_/Getty Images

Crowdfunding is slowly becoming a more popular way for new business owners to raise capital. Finding funding is one of the most difficult aspects of running a business. Pitching venture capitalists, whether talking with individual VC firms or groups of angel investors, can be a full-time job itself.

Crowdfunding is an organic way to raise funds and build a better business — and, fortunately, it doesn’t have to be difficult. By following a few simple strategies, you can open your company up to funding from the masses. Here's when you should crowdfund instead of seeking VC funding.

What is crowdfunding?

Though there are a few different types of crowdfunding, the principle remains the same. While traditional funding models involve a specific bank or group of lenders providing money to a company, crowdfunding allows companies to tap into the financial resources of the public. Think of it as fundraising on a grand scale. Instead of pitching banks or venture capitalist firms, you’ll be telling your business’s story to the public, who can elect to provide money to see your dreams realized.

This is all, of course, usually in exchange for equity or some other kind of incentive. The four types of crowdfunding are reward, equity, debt or microlending, and donation.

[Read: How to Choose Between Equity Crowdfunding and Angel Investments]

Crowdfunding is an organic way to raise funds and build a better business — and fortunately, it doesn't have to be difficult.

What is a venture capitalist?

A venture capitalist is an individual or group of individuals who invest money in startups and other small businesses. They are usually representing high net worth investors. Many venture capitalist firms will partner with companies to help them grow. This can mean both excellent mentorship and access to new business networks. Finding the right VC and convincing them to fund your business can be difficult. While Silicon Valley is the most famous area for venture capitalist firms, they can be found in many major cities and municipalities across the nation.

Working with a venture capitalist involves finding one, pitching it, reaching a deal, then putting your plan into action. It can be the right financial situation for many businesses.

Signs you should choose crowdfunding over a venture capitalist

The right choice for your business may not always be an obvious one. These apparent signs could be indicators it’s time to consider crowdfunding as a viable financing option:

  • You want guidance and opinions from consumers: Tapping into the public for financial resources also means tapping into their general opinions. Crowdfunding can be a good way to get early feedback on your business product or idea.
  • You want a platform where you can market your business: Using crowdfunding websites is often the first marketing step for small businesses. By taking your idea live, you’ll start experimenting with how you want to market your company.
  • You want validation for your business: Maybe you have a great idea, but you’re not sure if other people will be interested. Posting your fledgling company on a crowdfunding site can be a good way to gauge interest.
  • You have a compelling story to tell: If your business was birthed from a compelling story, you can stand apart from other companies on crowdfunding sites.
  • You have an existing network to support you: If you’re looking to boost your company to the next level and already have a good support network, crowdfunding can give you the exposure to expand your business.
  • You know your target audience: Many niche businesses thrive on crowdfunding. If you already have a following, it may be time to tap into that audience to take your company to the next level.

[Read: How to Decide Between Crowdfunding and Venture Capitalists]

Every business is different, and every financial forecast varies based on your company’s size, history and goals. The key to being a great small business owner is understanding all of your options and following the right path toward conservative growth. If you have been trying to force funding from banks or venture capitalists, crowdfunding may be the new financial path to expand your company.

CO— aims to bring you inspiration from leading respected experts. However, before making any business decision, you should consult a professional who can advise you based on your individual situation.

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Published March 02, 2020