The Advantages and Disadvantages of Crowdfunding Your Business

Crowdfunding has revolutionized the way in which businesses can raise capital to start up or to expand. A successful crowdfunding campaign can provide funding in a short amount of time and allow people to get involved in a business at the ground floor. As with everything, there are benefits and drawbacks to crowdfunding. Here are a few of each.

Advantages

Income. The obvious first benefit is cash. Addressing capital needs is often the most difficult challenge facing a young business. Crowdfunding can provide a much-needed cash infusion that can allow your team to focus on other points of execution in your business.

Get honest feedback. If you observe best practices in a crowdfunding campaign and are still having trouble attracting interest in your project, it may be that your product or service is not meeting a big enough need or solving a meaningful problem. By inviting input from the masses, you can get invaluable insight from would-be customers as to what is good and not good about your idea. You can even set up for pre-orders to gauge consumer interest and make the first run more worth the effort.

Take advantage of the lab. Just as backers in crowdfunding will give you feedback on whether your project has legs, they will also give very valuable feedback on whether or not the product or services is likely to work as promised. Expect to get comments, questions, and critiques of the product or service as well as requests for improvements to make the product more useful or adaptable to certain situations.

Legitimacy from the platform. Respected crowdfunding sites vet projects before they are listed, so if you make it through that process, there is instant credibility that is attached to your project.

Disadvantages

Expect to work really hard. To make crowdfunding work, it’s not enough to fill out a few online forms, hit post, and rake in the money. You need to have thoughtful marketing, a well prepared video, and many other components lined up.  This often requires a team with expertise in designing and implementing successful crowdfunding campaigns. Be prepared to work to answer questions from potential backers.

It can be all-or-nothing. Some crowdfunding platforms take pledges and only collect money from your backers if you meet your stated goal.  In other words, if your goal is to raise $10,000 and you only raise $9,900, you may end up with nothing in the end. It is very important to set a realistic goal but also one that will get you the desired result.

It can affect future financing. If your crowdfunding request falls shorts, this can stay on the site forever and be accessible in the future by potential investors. Not only that, they can also see how much you failed to raise and the quality (or lack thereof) of your campaign. In the case of equity crowdfunding, even if your campaign does succeed, sophisticated investors may be reluctant to invest alongside of many shareholders who have little to no experience.

It may not be worth the effort. If your goal is to raise only a relatively small amount, crowdfunding may not be the most worthwhile use of your time. It is really most beneficial for raising larger amounts than what you can get through small loans or donations from friends or family members.

If you’re thinking about crowdfunding for your business, consider scheduling a consultation with our firm. We can help you understand the ins and outs of crowdfunding and how to make it work for your business. Contact us today to get started.

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