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5 signs you're ready for crowdfunding

Today's startup world is fast-paced and competitive, and many fledgling companies feel like they need to gain sizeable investments early on in order to succeed. Built in Chicago explained that the trend of seeking large sums in the form of angel or venture capital is often detrimental for new businesses, as they aren't quite mature enough to sustain the financial pressure that accompanies these types of high-stakes investments.

However, startups that hope to grow and prosper do need money to get off the ground, which is where the concept of crowdfunding comes in. Crowdfunding, most often implemented through sites like Kickstarter, GoFundMe and IndieGoGo, allows businesses to create pages explaining their ideas and missions and receive donations from any interested party on the Internet. In return for the public support, companies usually offer rewards to backers who contribute certain levels of money. For example, a startup for a new iPhone app might offer free downloads to people who donate $20 or more.

While the world of crowdfunding is significantly less risky than the practice of seeking out large-scale investments, it's not a step that startups should jump right into. Is your startup ready for crowdfunding? Here are five signs you should consider raising money this way.

1. You have a compelling story
People aren't going to blindly donate cash for a project that sounds mildly interesting - they need to be convinced through your startup's story. According to a recent ProOpinion poll, nearly 34 percent of professionals believe that having a compelling story is the most telling sign that a startup is ready for crowdfunding. FundRazr recommended asking yourself the following questions concerning your business:

  • Do you have a one-of-a-kind back story that will be of interest to your target audience?
  • Are you extremely passionate about your company? Do you genuinely want to engage people on the subject of your industry?
  • Is your vision clear enough that people will understand exactly what you want to accomplish?

If so, you also need to have an idea of how you'll relay this story to potential investors. Forbes magazine explained that using content like music, video and graphics with a personal, human touch are often far more successful than simply listing hard facts and percentage points. While market research is compelling, people want it to be presented in a manner that elicits an emotional response.

2. You're still in preliminary business stages
There's a sweet spot in the lifecycle of a business when crowdfunding is ideal. Built in Chicago explained that companies should have already exhausted all of their primary funding options - i.e., their personal bank accounts and the generosity of friends and family. They should also be too young for banks to want to give them loans, and certainly too green for angel or venture capitalists to be seriously interested. In essence, you should be confident that your project will be a success, but need more funds to inspire others to feel the same way.

3. You've received encouragement from friends and family 
It might seem like an obvious tip, but if your closest supporters aren't encouraging your business venture, it's probably not ready to be crowdfunded just yet. Think of your loved ones as a sample set of potential investors who would come across your business plan online. If even people who have personal relationships won't get behind your ideas, you probably need to head back to the drawing board.

FundRazr noted that some entrepreneurs operate under the "if you built it, they will come" mentality, as opposed to gaging reaction and support before diving right in. Don't waste time or money on creating something that won't be a success - ask your loved ones for their honest opinions. 

4. Your business will have a positive impact on the community 
While some people give entirely altruistically, the vast majority of crowdfunders invest because they believe their money will be used to make a difference. Make sure your business plan and startup story clearly outline just how your project will have a positive impact. Are you trying to raise funds for an app that alerts users to available parking spots in the area? Be transparent about how this idea will keep people from being late while also potentially reducing stress, traffic and car accidents.

You should also do some research into how other similar startups have fared when leveraging their community goals to gain donations. Be wary about making promises you can't keep, as tarnishing your credibility in the early stages of your company's growth could cause things to fold before they even take off. Look at predecessors who have been successful and who have failed so you can learn from their experiences. 

5. You have a social media presence 
Creating social media accounts should be one of the first steps you take as a startup. Through channels like Facebook, Twitter, Instagram and YouTube, you can give potential funders a peek inside your entrepreneurial endeavors. People who are considering investing in your business will inevitably want to see proof that their dollars are being used to propel a promising venture forward, and are likely to search for evidence of your business plan all over the Internet. 

Additionally, social media is a crucial tool in terms of attracting people to your crowdfunding page. Social pages can be used to reach out to family, friends, business leaders and personal connections. Forbes magazine explained that many successful entrepreneurs gain important visibility in their companies' early stages simply by cultivating a presence online. The source noted that you should connect with alumni, community and industry groups via social platforms, as getting one of these widely-followed entities to repost information about your project could garner a lot of financial support.

If you haven't showcased your business plan on social media yet, you may want to reconsider pursuing crowdfunding until you have a decent number of followers and interactions. Credibility is often associated with quantity and quality of web content in today's Internet-driven market, which is why posting frequently on social channels is important. 

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