Planning a New Business: Alternative Funding Sources


We talked last time - yes a whole 2 weeks ago - about funding a new company. There are two funding sources that I have deferred to today. The first is Micro Loans and the second is Crowdfunding. Finally, I want to say something briefly about Crowdfunding in general.

Micro Loans are generally smaller amounts that can be used to help fund a new business. They are available from lots of sources. The Small Business Administration (SBA) of the US Government has its own program. Most of the more well known micro funding sources have a social consciousness objective as well. They are intended to provide small amounts of capital to help those that can not receive funding from existing banking sources. There are lots of programs and they all have different requirements. If you have exhausted your other sources, then this might be a place to start.

Crowdfunding is different. Unlike other sources of funding, Crowdfunding is a way for people to donate to you to start a company. The quid pro quo is generally some form of perk. The funder has no rights to the use of proceeds. On top of that, there is neither an ownership or debt position that is created as part of this funding. The types of investments that get funded often have some form of social responsibility. This can include sticking it to the purveyors of the status quo. Significant capital (sometimes over $1M) has been generated via Crowdfunding, but much smaller amounts are more typical.

I want to point out something that comes out of Crowdfunding and that is the push to change the definition of an Accredited Investor. When you are starting a company and selling equity (aka Stock), there are limits to the number of small investors that can be included. To keep things simple, some companies won't sell stock to non-Accredited Investors. Folks are greatly concerned that the requirements to be an Accredited Investor are very high so that the number of people that can invest is small. There are groups that feel that this is too restrictive and want the SEC to dramatically lower the requirements.

I wish to argue caution here. 9 out of 10 startup businesses fail within 5 years. That means that startup investing is on the very edge of High Risk/High Reward spectrum. You should assume that any investment is gone the moment you make it. Even if the company survives, early investors often their ownership diluted to the point that they get no return. This is especially true in the case of Crowdfunding. If you want a classic case of this, look into Oculus (acquired in 2014 by Facebook). The Crowdfunders were very unhappy because they are generally unhappy with Facebook. They felt that their good will was abused, by the sale. Remember, as a Crowdfunder you have no rights so you get what you get.

So, one more in this series and then I go into the next series (which I will announce at the end of next week's article).

Jim Sackman
Focal Point Business Coaching
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