April 20, 2011

Are You Running a Charity or a Business?

Filed under: Growing Your Business — Tags: — Meredith @ 1:02 pm

I generally consider myself a pretty giving person. I regularly donate to area animal rescues, and open my home to foster animals. I even bring my business into the mix, running a major fundraiser every spring and donating 100% of the revenue from selected products to charity. All of that said, my least favorite website on the whole internet is Kickstarter, and let me tell you why: it allows for profit entities to paint themselves as charities.

This irks me for a variety of reasons; first and foremost, there are plenty of legitimate charities that need support. There are homeless animals who will be killed without enough money to run shelters for them until they can find homes. There are people in Africa who will die of malaria if they don’t get mosquito nets. There are people in Japan right now who’ve lost everything they own to natural disaster. These people, these animals, they are dealing with devastating life and death problems. They deserve our compassion, they deserve our support and they deserve our charity.

This brings me to Kickstarter, the medium that allows people to ask for free money to tour with their band, produce their spring line for their clothing company, or manufacture their latest invention in China. It’s not that I’m against innovation, art or creative projects. What I’m against is for-profit enterprises using the internet to essentially panhandle under the guise of social good.

Still not sold on the yuckiness that is asking for handouts for your business? There’s more. Not only am I irritated at seeing my peers behave this way, it’s the wrong way to win the hearts of customers. Your customers aren’t dumb. They know what you’re doing, and as much as they may like you or your products, they don’t want you coming to them for free money. Customers want to know what you’re going to do for them, not what they can do for you.

Imagine how you’d feel if you went out to dinner, and when you went to pay the check the server asked you to please include some extra cash with the bill because the restaurant wants to build an addition so they can host private parties. I know what I’d be thinking: “I just spent $50.00 on dinner. Pay for your own damn addition! Why should I give you extra money so you can make more money with your business with zero benefit to me? What do I get out of this? Go get a loan or something.”

Sure, the restaurant could argue that they’re establishing a new venue for private parties in the neighborhood, something people in the neighborhood would use, but this isn’t a community center. This is a for-profit entity that will make money on my neighbors by renting their space for parties. That’s fine with me, but don’t ask me to fund it. Businesses are eligible to reap the financial rewards of their operation because they’ve accepted the risk that is funding their venture. Running a business comes with expenses and risks; if you’re not prepared for that reality, running a business is not for you.

So what can a small business do that’s less yucky and still helps them get the funds to operate their business? A few things:

Hold a pre-sale
And to be fair, a lot of companies are kinda doing this on Kickstarter, but the Kickstarter set-up makes it seem like you’re getting a gift for a donation, kinda like NPR giving me a free beach towel with my pledge of $25.00. Don’t do this, just have a pre-sale. And by the way, typically with pre-sales customers realize they are paying in advance for something not ready to be delivered, and in doing so they get offered a discounted price. If you want them to scratch your back, scratch theirs.

Get a loan
Businesses of all kinds get loans. It’s an extremely popular way to get cash you need to operate your business. Yes, you’ll need good credit, yes, you’ll need to pay interest. You have to decide if the return is worth it. If you need $10,000.00 to manufacture your spring line, but you know you can pay the loan back within 6 months, at an interest rate of 10% this loan should cost you $500.00 If you can produce 1,000 pieces for the spring line and sell them at $20.00 per piece you are looking at making $20,000.00. After you pay off the loan and interest, you are still sitting on $9,500 in profit. So yeah, it’s probably worth losing the $500.00. Get comfortable with the math behind operating your business—it’s an essential part of running a profitable enterprise.

Get investors
Investors are another common way to get funding for a cash-strapped business. Like loans, investors need to be paid back, but unlike loans, investors usually only get their money back if the enterprise is successful. The investor is taking some risk, but they are doing it in exchange for a slice of your profits.

Leverage Personal Assets
Sell something you own that’s expensive; borrow against your home equity if you have to. Conventional financial advice is against these maneuvers, but if you have a more sophisticated understanding of finances you know these can sometimes be a lower interest way to get ahold of the cash you need to make more money.

Obviously you don’t take money out of your home to buy a new big screen TV or vacation in Jamaica, but sometimes it is the best move for getting some cash for a profitable venture. When Suze Orman tells you to avoid debt, frankly, her advice is for finance novices. Most of her fans aren’t business owners, and they got into debt doing dumb stuff like buying jet skis on credit. For them, yes, credit cards are the devil and debt should be avoided. If you have a sophisticated understanding of loan terms and interest rates and a solid plan to pay back borrowed money, the smart move is getting the lowest interest rate you can get and making the investment that’s going to make your business more profitable.

Before lending yourself money, do some projections to see if the return you can get out of your business beats the expenses of borrowing the money. If you feel it’s too risky and don’t think you can make your money back, why would you go to Kickstarter and ask customers to put up money for an idea you yourself wouldn’t invest in?

While it may be tempting to ask customers for free cash, think about how it ultimately reflects on you and your brand and how customers are going to perceive this request.

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6 Comments »

  1. Wow! I agree. For several months I’ve kicked around (no pun intended) the idea of using kickstarter for my spring fabric line. There was always something about it that made me uncomfortable. You just put it into words for me. It’s yucky! I’m glad i followed my gut and was resourceful enough to find another way.
    Great post, thanks

    Comment by crash pad girl — April 21, 2011 @ 3:55 am

  2. Fantastic post….this is why you are my first destination when I turn on my computer !

    Comment by Alison — April 21, 2011 @ 4:34 am

  3. I don’t like the idea of businesses using Kickstarter to get money to develop their new products. If you’re going to be a business, be a *business*, which includes paying for your own stuff.

    However, I do think that consumers really love Kickstarter instead of normal pre-sales, because they don’t pay one cent until the outcome is guaranteed. No more worrying about needing to chase after the seller for a refund if they don’t make enough in pre-sales to actually produce the item.
    Most of the small-time indie people on Kickstarter (eg individual webcomic artists, actual tiny charities or itty-bitty non-profit organizations) do offer extra discounts and bonus items to people who pre-order through Kickstarter, as a reward for letting them use their money to get the product off the ground. Its like holding a normal pre-sale, but the consumer feels more protected.

    Comment by Caitlin — April 21, 2011 @ 6:52 am

  4. I don’t know if I completely follow the logic about it being more secure, even if the person gets funding, if they are a flake, they may not make good on a promise to deliver goods. However, if a brand has a good reputation with its followers, their customers should be comfortable buying items on presale. I guess I can only speak for myself as a consumer, but if a company I knew and liked had a presale, I’d actually rather buy through their site than Kickstarter.

    I do agree that it’s fine for charities and non-profits to use Kickstarter. I just see it being used by for-profit companies way more often than anything else and it’s been driving me totally crazy! I’ve even seen people asking for nonsense like asking to have their vacations funded! Just gross!

    Comment by Meredith — April 21, 2011 @ 6:59 am

  5. [...] I was at CCE, Tina asked me if I’d read this blog post, which states that Kickstarter allows businesses to portray themselves as [...]

    Pingback by Do People Hate Kickstarter? (And, How I Supported Free in August) — September 6, 2011 @ 12:43 pm

  6. Beautiful post!

    One of my competitors keeps running a kickstarter. What really bugs me is that it’s nothing more than an ancillary part of her current business. It’s like the restaurant asking for customers to pay for its expansion.

    I am in full agreement that business owners need to find a way to fund their businesses, but it shouldn’t be by soliciting donations.

    Comment by Marcy — September 7, 2011 @ 11:55 am

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