Question
What are the downsides, if any, of a small business using funding websites such as Kickstarter and Indiegogo?
CRAIG LETOURNEAU,
AMERICHANNELS LLC.
Answer
Kickstarter has certainly made headlines and with the passing of the Jobs Act, a number of crowd-funding platforms have sprung up recently. To answer your question, it is important to distinguish platforms like Kickstarter and Indiegogo from others, like Crowdfunder.
According to their respective guidelines, Kickstarter is not intended to be used for a startup or existing business. It is a donation platform for "projects." Indiegogo will allow donations for any "campaign," and Crowdfunder is a true investing platform in which investments are made in exchange for ownership of the business.
Regardless of the platform that is best for your situation, two issues can emerge for the project and its founders. First, most projects are funded through the efforts of the founder and the founder will spend a significant amount of time working daily with Twitter, Facebook, Google+, e-mail and other social media networks.
You'll need to search for new networks as a way of expanding your reach, and you'll have to engage your current backers with regular updates and answer their questions about progress. Some successful users of crowd-funding sites suggest working more than one platform at a time. The most significant downside is that people will be critical of your project and some backers will leave. The rejection can be significant and you need to be ready for it.
The next issue is more specific to platforms that exchange ownership for money (i.e. equity investments). Success on a platform like Crowdfunder can create a crowding of the Cap Table (a spreadsheet or table that shows ownership stakes in a company). This is a messy technical issue that can create problems during larger, later rounds of fundraising. The nature of your business and market space will, in part, determine the significance of these problems.
