Today, an increasing number of start-ups and artists are utilizing the crowdsourcing phenomenon known as crowdfunding. Crowdfunding describes the cooperative effort of individuals who network and pool their resources via the internet to support efforts initiated by people or organizations. Crowdfunding has been used to support a number of activities such as disaster relief, support of artists by fans, political campaigns, start-up companies, movies, and free software development.
Obviously, one can see the enormous potential of crowdfunding. Crowdfunding allows more individuals to make their dreams and ideas come to fruition. Kickstarter has raised $574 million since its start in 2009. In the last six months alone, Kickstarter was able to raise $203 million dollars, and it doesn’t seem to be slowing down. In addition, other crowdfunding sites such as Indiegogo, Crowdfunder, RocketHub, and Crowdrise are equally on their way to the same growth and success.
However, while crowdfunding may seem like every start-up’s dream come true, a smart entrepreneur must always weigh the pros and cons before deciding to utilize this method to raise capital.
The Pros
Entrepreneurs from all around can testify to the struggles and difficulties of accessing capital to finance new ventures. Crowd-sourced funding is a great alternative to seeking venture funding because users are able to do so without giving up equity or accumulating debt. Instead, entrepreneurs can distribute products or gifts to the funding community in exchange for capital, also known as rewards-based crowdfunding.
In addition, crowdfunding platforms are a great way to market a new business and generate awareness. These sites are typically free and offer a wide variety of ways to reach a large number of people. For example, businesses are able to promote themselves and their mission through social media channels, word of mouth, and increased referral traffic to their company’s website.
One of the biggest advantages of crowd financing is that it allows ventures to gain consumer feedback earlier in the process. Successful businesses use customer suggestions to better their processes, products, or services. Unfortunately, sometimes these changes are made way too late in the game, causing the business to fail. Crowdfunding eliminates this anguish by allowing entrepreneurs to gauge customer reactions, foster users’ ideas, and test the product before it even hits the market. Not only does this save a company from experiencing a large financial loss, it demonstrates that a business is ready and willing to listen to their customers right off the bat.
The Cons
While crowdfunding has a large number of benefits, there are some disadvantages as well. For example, this funding method exposes an entrepreneur’s idea and detailed insider information to potential competitors. This increases the risk that the owner’s idea may be copied or stolen, especially if the competition has better financing.
Another drawback to crowdfunding is that it is not a viable method for long-term financing. While it is great for funding small, one-time projects, it is not so great for generating an ongoing flow of financial resources. However, companies can always use crowd financing as an additional fundraising tool; for example, a specific project need such as a promotional event.
Additionally, the amount of money a venture is able to raise is limited. Crowdfunding caps the maximum amount allowed to be raised at $1 million dollars in any 12-month period. This is a huge downside as most start-ups need much more than that to even get off the ground. Because of this, most companies would benefit far more from angel investors or venture capitalists if they were seeking a substantial amount of capital.
Although there are many benefits to crowdfunding, such as greater access to capital, better brand visibility, and direct consumer feedback, one must proceed with caution. It’s important for entrepreneurs to weigh the pros and cons of this method before making any strategic fundraising decisions. Keep in mind that crowdfunding exposes your idea to competitors, caps the amount allowed to be raised, and is an unreliable way to generate on-going capital. Once you have considered these factors, move forward in confidence that you have made the right decision for your business