Pros & Cons of Crowdfunding
Going it alone in the world of business is incredibly daunting. After all, a staggering 30-50% of small businesses fail within the first five years or so and financing a new venture can be horrendously difficult in the current economic climate. Thankfully, crowdfunding is today a viable option for those starting or looking to expand their venture.
But what exactly is crowdfunding? As defined by the Small Business Administration, crowdfunding is the practice of raising monetary contributions from a large number of people via the internet and other digital tools. The concept hinges upon the idea that if enough members of the public believe in a product, service, or cause, then they will contribute to it financially.
If you are considering crowdfunding as a method of financing your small business venture—or putting your existing business on the cards—consider this article about the pros and cons before heading full steam ahead.
What is the Benefit of Crowdfunding?
The very concept of crowdfunding takes away much of the risk and uncertainty involved in soliciting funds for a new business venture. As with any form of funding, however, there are pros and cons to utilize this source for financing. Here are the benefits of crowdfunding:
1. Accessibility to Startups
For those who don’t have the resources required to obtain venture capital, crowdfunding is an incredibly viable option. Start-up costs can be incredibly expensive and require substantial amounts of capital. Crowdfunding allows entrepreneurs to access these large sums of money without the guidance or control of overly-protective venture capitalists.
2. Publicity of Your Brand
Unlike more traditional forms of financing, which typically involve a small group of strategic contacts, crowdfunding gives you access to a much larger website, which allows you to spread the word of your venture to a much larger and more diverse audience.
3. Potential for Testing
In addition to the obvious benefit of raising money for your business, crowdfunding can also provide a way to test the marketability and response of a product or idea. Before investing in the development of a product that may or may not be successful in the market, you can use crowdfunding as a platform to determine the public’s response and more accurately assess the viability of a particular product or service.
4. Engagement with Investors and Consumers
Crowdfunding helps to create a deeper connection between investors and businesses. This type of engagement between the public and entrepreneurs is incredibly beneficial as it can provide a valuable insight into the idea or product, as well as allowing potential customers to buy into a brand before it’s even available on the market.
What are the Drawbacks Of Crowdfunding?
Equally important to the discussion of crowdfunding is a consideration of the potential drawbacks, which could unravel the success of a venture.
1. Intense Competition
As crowdfunding finds ever-increasing traction, so too does the subsequent competition. There is an increasingly high number of businesses and entrepreneurs, who are attracted to crowdfunding for all the reasons detailed above and with competition, comes an increased risk that a particular venture might not receive the requisite level of funding needed.
2. Potentially Unsatisfactory Returns
Most investors also consider the potential financial return of a venture, today and into the future. With crowdfunding, it is much harder to succinctly predict the success of a venture and what type of returns may be made by investors. Even those who do successfully fund their venture may find that their intended returns, although potentially satisfactory at the outset, will not always be achievable once the venture is operational.
3. Regulatory Issues
Additionally, for those who are successful in their crowdfunding endeavours, there is a further drawback to overcome with securities law. If a business raises a substantial amount of money by selling an equity stake in the company, it must comply with the rules and regulations and accurately present all the necessary information to would-be investors. Without this being done, the business can run into serious legal trouble—which could significantly detract from the success of the venture.
4. Lack of Traditional Finance
Speaking of venture capitalists and other sources of traditional finance, it is advantageous to recognize the potential disadvantages of skipping these both in the short and long term. While venture capitalists might be more interventionist in decisions and processes than crowdfunding, they are often invaluable to consult on scaling operations and improving financial processes. Without tapping into a traditional source of finance, start-ups and entrepreneurs may struggle to take their venture to the heights they hope or as envisioned.
Crowdfunding is an incredible option for access to finance for those looking to start their own business or scale an existing venture. But it is also important to recognize the potential drawbacks of relying on the public for financing. Good planning and careful consideration of the evidence should ensure that investments will be made wisely, with the success of a venture being paramount. Highlighting all the pros and cons of crowdfunding should ensure that you make the best decision for your business.
