10 Pros and Cons of Business Crowdfunding
This article is part of a larger series onBusiness Financing.
Business crowdfunding is a great way to raise money for a new business, product, or idea. There are numerous crowdfunding platforms on the internet, and all of them can increase exposure, build an audience, and raise money to fund a business. However, success rates are low, and it can be a stressful process.
Consider the pros and cons of business crowdfunding before proceeding.
PROS | CONS |
---|---|
Low overall risk for a potentially high reward | Low success rate |
Increased exposure | Long preparation time |
Established audience with centralized communication | Difficulty getting noticed |
Community building and feedback collection | High fees and strict rules |
Helps you avoid giving up equity in your company | High upfront costs |
Product and idea validation | Chance of someone imitating your product |
Increased momentum | False positives |
Reward flexibility | High pressure |
Small individual contributions | Community is full of scammers and trolls |
New opportunities | Reputation risk |
The Pros of Business Crowdfunding
Crowdfunding can be an excellent way for a startup to secure early funding without taking on debt or giving away equity in their company. There are manygreat crowdfunding sitesto choose from, and thecrowdfunding processcan be fairly straightforward.
Here are 10 pros associated with business crowdfunding.
1. Low Overall Risk for a Potentially High Reward
While you lose the administrative fees involved with setting up a crowdfunding campaign, the overall financial risk to your company for a failed campaign is relatively low. If the campaign is successful, it can be a huge financial boost. On Kickstarter,the average campaignraises just shy of $30,000. However, some campaigns raise more than $1 million.
In addition, unlike astartup business loan, you don’t have to repay money earned through a successful crowdfunding campaign, which makes it a lower-risk option than a loan.
2. Increased Exposure
Startups don’t often have large marketing or public relations departments. Another benefit of a crowdfunding campaign is the exposure your product or service can gain, bringing in both new customers and investors. As of December 2021,more than 20 million usershad pledged to back a product on Kickstarter. Projects with high backer numbers often attract media coverage, which can add to your company’s exposure.
3. Established Audience With Centralized Communication
The reach of your company’s social media is limited to your current followers. When you start a crowdfunding campaign, established users can search and find your product or service, then learn more about it. In addition, it gives you a centralized location for updates on your campaign—you won’t have to send out emails or messages every time there’s an update. This can save you a lot of time and money.
4. Community Building and Feedback Collection
Building a community around your product gives you a chance to build a client base and gives you built-in testing and feedback on your product. While some of the feedback might not be useful, some of it will be highly valuable and allow you to make necessary changes that will help the long-term success of your business.
5. You Can Avoid Giving Up Equity in Your Company
Other types ofalternative startup fundinginvolve giving up a portion of the equity in your company for funding. Most types of crowdfunding allow you to give rewards rather than giving up equity. This keeps you from taking on partners who might have different goals and ideas about your business, and it allows you to benefit completely from any profits your business earns.
If you decide to use equity crowdfunding, remember that certain laws govern this transaction. Consult a legal professional before proceeding with equity crowdfunding.
6. Product and Idea Validation
Running a crowdfunding campaign for your product can show you whether there’s a market demand for a product before you manufacture it. If your product is expensive or complicated to create, producing it before seeing if there’s a market for it can be devastating if it doesn’t work out. In addition, if the crowdfunding campaign shows a large market for your product, it might help you secure larger funding from angel investors or venture capitalists down the road.
7. Increased Momentum
Successful crowdfunding campaigns often take on a life of their own. They can go viral, attracting attention from social media, the press, and even online influencers. If people with large audiences start promoting your campaign, it might be incredibly successful.
8. Reward Flexibility
One important part of running a successful business crowdfunding campaign is having good rewards for supporters. Small rewards can often be things like early access, signed memorabilia, or sometimes, just a “thank you” on the company’s website. Large rewards often involve discounts on final products or even meet-and-greets with company owners. Creative rewards might be the deciding factor in whether or not someone supports your campaign.
9. Small Individual Contributions
Not everyone will be able to offer as much financial support to your campaign as others will. However, that doesn’t mean their contributions are useless. Even small monetary contributions can add up, plus those donors often feel more obligated to support the company through social media to make up for smaller donations.
10. New Opportunities
Starting a crowdfunding campaign can open up additional opportunities for your business. You might find large investors in the crowd of backers who can offer exposure and expertise. Investors might turn out to be future hires for your company as they often have similar interests to the companies that they invest in. These supporters can end up helping your business more than any monetary contribution can.
The Cons of Business Crowdfunding
While crowdfunding can be a great way for a startup to fund a new business or product, it isn’t without drawbacks. Crowdfunding campaigns don’t always succeed, can take a long time to prepare, and come with high pressure and other risks.
Here are 10 cons to business crowdfunding to keep in mind.
1. Low Success Rate
The majority of crowdfunding campaigns fail to meet funding goals. On Kickstarter, only39% of crowdfunding campaigns成功资助,尽管运动吗crossed the 20% funded threshold were successful 78% of the time. Many factors contribute to the lack of success, including poorly planned or timed campaigns and a lack of a good crowdfunding business plan.
2. Long Preparation Time
A lot of preparation goes into a successful crowdfunding campaign. In many cases, a prototype product needs to be created. There are videos, advertisements, explanations, contribution tiers, and rewards to plan out and produce. And once a campaign goes live, a business needs the staff to answer questions promptly. All of these things take time and effort.
3. Difficulty Getting Noticed
Crowdfunding campaigns aren’t found automatically by investors because they use one of the big crowdfunding platforms. Once your campaign is up and running, you have to work to generate a buzz to drive traffic to your site. While this process is more straightforward with a centralized campaign site, it doesn’t happen automatically, and it can be time-consuming and expensive.
4. High Fees and Strict Rules
Crowdfunding sites generate revenue through fees charged to businesses running campaigns. Those sites usually take a percentage of proceeds from a successful campaign (usually 5%). So, if you raise $100,000, the website takes $5,000 of that off the top.
In addition, these sites have strict rules regarding how campaigns are run. They limit what kinds of rewards you can offer and how much information you can include in your campaign. If you choose to use equity crowdfunding, to protect you and the investor, the rules are even more strict.
5. Upfront Costs Are Expensive
The setup costs for running a crowdfunding campaign can be very expensive. You have to prepare marketing, logos, promotions, and ads for the campaign. These are things you have to budget for before launching the campaign because if it fails, you won’t be able to get that money back.
6. Imitation Products
Because you have to put every detail about your product into a crowdfunding campaign, there’s a genuine concern that others might rip off your idea and sell it as their own. Before beginning a campaign, consult your legal advisor to discuss ways to protect your intellectual property before exposing it to a worldwide audience.
7. False Positives
有两种类型的从crowdf假阳性unding. If your campaign takes off quickly, it might give you the impression that it will be wildly successful. Then, when interest wanes and your campaign fails, it can be demoralizing. Also, if a campaign fails, you might assume that the idea wasn’t good or the product didn’t have merit. The reason it failed might have been because it was poorly marketed or promoted, not because it was a bad idea.
8. High Pressure
Because a crowdfunding campaign is usually conducted in a short window of time―usually 30 to 60 days―the pressure to succeed quickly is magnified. In addition, if your campaign is successful, the pressure ramps up to deliver the promised products and rewards. Investors can grow impatient if there are delays.
9. Community Is Full of Scammers and Trolls
While the online community can be a great place to promote and sell your product, there are people online who actively work against your success. Scammers have damaged the reputation of many crowdfunding sites by attempting to raise large amounts of money, then disappearing without producing a product. This has caused some investors to be cautious of startups with little history of success that promise a great product or service.
In addition, the internet and social media are littered with trolls who don’t care about your product as much as they do their 15 minutes of online fame. They aren’t afraid to drag your reputation or your product’s reputation through the mud for a few views online. It can damage your campaign and be emotionally painful for you.
10. Reputation Risk
If your campaign is funded successfully, it’s critical that you deliver on your promised products, services, and rewards and do so on time with high quality. If there are delays, be open and honest about them with your investors. Your reputation is everything as a startup, especially if this is your first major online funding campaign. Failing to deliver to your investors might be something your business never recovers from.
Alternatives To Crowdfunding for Business
You may decide that crowdfunding might not be best for your business. There are other great alternatives available for startup funding. Here are three different options for startup funding for your business:
- Small Business Administration (SBA) loans for startups:While a lot of work goes into getting an SBA startup loan, these loans, guaranteed by the SBA, are a great way to fund a startup.SBA microloansoffer working capital of up to $50,000. Check out ourguide to getting a small business loanbefore applying.
- Rollover for business startups (ROBS):If you have at least $50,000 to contribute from your retirement savings, you can use it to fund your startup through a ROBS. These can be very complicated, socheck out our guide to ROBSand consult your financial advisor before attempting a ROBS.
- Small business grants:There are grants for startup businesses available from nonprofit organizations and every level of government. Grant money doesn’t have to be repaid, but you should be sure to follow the requirements and application steps closely. Check outgrants.govto see the federal grant list and begin the application process.
Bottom Line
Crowdfunding can be a great way for startup businesses to raise money for a new product or service. A successful crowdfunding campaign can allow a business to build a customer and investor base that ensures future success. Crowdfunding campaigns often fail, and the ones that succeed can still run into problems if promises aren’t kept. Be sure to weigh the pros and cons of crowdfunding and consult legal and financial advisors and any business partners before proceeding.