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Crowdfunding is one way to raise funds for your small business. If you are short of cash or want to build a financial cushion, crowdfunding is a solution you should explore. Crowdfunding is an increasingly popular way for SMEs to raise funds. One reason is that crowdfunding can deliver results quickly.

 

Pros and Cons

As an SME leader, before you decide to use crowdfunding as a financial solution, take a look at the risk and assess the advantages and disadvantages.

Some of the advantages of crowdfunding

  • It attracts attention which can help your business grow beyond just the money you have raised
  • Raising large amounts of funds can happen quickly, sometimes in a matter of days
  • It is a niche for non-mainstream ideas

Some disadvantages of crowdfunding

  • Failed projects risk damaging the reputation of your business and people who have pledged money to them
  • Getting the rewards or returns wrong can mean giving away too much of your business to investors
  • A public display of your ideas risks being copied easily and quickly

 

Crowdfund Platforms

Crowdfunding platforms are internet websites that provide a way for a large number of people, the crowd, to provide money in small increments to support a person, a project or a legal entity. There are a lot of choices available. Here are two success stories.

MyStartr

Established in 2012, the MyStartr crowdfunding platform is for those who aspire to turn creative projects into reality, be it films, games, music, art, design or technology. The creators are wholly responsible for the projects. Since its inception, MyStartr has funded over RM1 million worth of projects but does not allow fundraising for personal gain.

 

pitchIN

Also founded in 2012, pitchIN is widely recognised as one of the most successful crowdfunding platforms in Southeast Asia. It has a track record of successfully executing projects like the first ever Indie festival in Penang, TAPAUfest.

pitchIN allows Reward Crowdfunding where ideas or projects pitched to the public and backers receive rewards from project owners. It also offers Equity Crowdfunding where private companies can utilise an online mechanism to raise money from investors in exchange for shares in the company.

 

Crowdfunding vs Equity Crowdfunding

If you decide to explore crowdfunding for your business, you then need to decide what kind of crowdfunding is best for your business. One way to do this is to compare and contrast crowdfunding with equity crowdfunding.

Crowdfunding means raising capital through the crowd through the (pre-)sale of a product, donations, or perks. Equity crowdfunding means raising capital through the crowd through the sale of securities. Here are some of the differences between the two approaches.

Crowdfunding is unregulated so you can use it to

  • sell whatever you like to your crowd or the public in general
  • raise as much or as little capital you want
  • once your company delivers the ‘terms of the sale’, you are no longer beholden to the participants in your crowdfunding campaign

Equity crowdfunding is regulated so you can use it to

  • sell securities to the public (common stock, debt, convertible notes, etc.) to raise money
  • Sell securities to the crowd. The participants are now their investors
  • Regulations around equity crowdfunding mean that your company must also comply with the regulations in the jurisdiction that your company is operating in

 

The key difference is that it is easier to launch a crowdfunding campaign than an equity crowdfunding one. So before you decide, ask yourself: “Will an equity crowdfunding campaign bring me more benefits than a crowdfunding campaign?” Don’t be dazzled by the sound of securities. Make your business as simple as possible.

If you are a sole trader or in a business partnership, you may or may not need extra capital to grow your business. Evaluate all the options, their pros and cons before you start crowdfunding. Remember: one or two’s a company, three or more’s a crowd.

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