Arranging funds is one of the biggest challenges facing small and middle-sized businesses. Especially in the early stages, entrepreneurs have to work hard to accumulate funds even though they have a great business idea. Fortunately, we live in an era where crowdfunding is booming at an astonishing speed allowing small and/or aspiring business to start their venture with adequate funds. No wonder, crowdfunding is one of the best choices for businesses that need money, but there are a few drawbacks as well. Here are a few reasons why new entrepreneurs like crowdfunding and a few cons associated with it.
What is crowdfunding?
In simple terms, crowdfunding is one way through which people or entrepreneurs can raise funds through the collective effort of mass investors, family, friends or customers. This approach is based on collaborative efforts of the larger pool of individuals who meet via social media and crowdfunding platforms to leverage potential entrepreneur’s ventures.
How is Crowdfunding Different from business finance?
Business finance is very different from crowdfunding in many ways. Traditional financing for business means launching a new product or service, making a business plan, prototypes and hunting business personalities or institutions who would like to invest in your venture after some math. The majority of capital for your business comes from banks, venture capital firms, and investors to whom you would have to pitch about your company and offer them shares or a qualified interest rate on a loan in exchange for their investment.
On the other hand, crowdfunding offers you a place to build, present yourself and share your idea with a much larger audience. In traditional business financing, you may have to wait for months or even years to receive funds, but in crowdfunding, you can get them overnight if your idea is liked. It is comparatively much easier and less complicated while your company grows like the traditional business model.
Different types of crowdfunding
Donation-Based Crowdfunding
This is one of the crowdfunding options in which crowdfunding campaigns are run with zero financial return policy for the investors. Traditional donation-based crowdfunding includes fundraising for charity, medical bills, disaster relief and non-profit business.
Rewards-Based Crowdfunding
When investors offer funding for your business in exchange for rewards like a service or product from your company, it is called reward-based crowdfunding. Although this type of crowdfunding requires offering backers a reward, it is regarded as a good subset of donation-based crowdfunding as you do not have to commit any financial return or equity.
Equity-Based Crowdfunding
As compared to rewards-based crowdfunding and donation-based crowdfunding, equity-based allows contributors to become an integral part of your venture due to equity shares in return for capital invested. As equity owners, the investors are entitled to receive financial returns as well and can ask for a profit share in your company just like traditional business finance.
Cons associated with crowdfunding
Crowdfunding requires an ample amount of time and money
Although you may participate in crowdfunding for gathering funds, successful campaigns may require a lot of effort and investments. To attract investors toward your business idea, you should build good prototypes, make videos or write persuasive content in addition to marketing it well.
People may steal your business idea
Since crowdfunding platforms are open to all and accessed by the masses, it is feasible that some other people might like your business idea and starts working on the same before you accumulate finances for yourself. Therefore, experts recommend getting patents and trademarks before you persuade crowdfunding for fundraising, especially if your idea is novel and you do not want to face legal battles.
Crowdfunding may not be suitable for every business kind
Today, people are coming up with a unique idea, which is related to tech or education. Although you may opt for crowdfunding through a crowdfunding platform, certain kinds of businesses like a card game or mobile repair shop might not gain interest among investors. Similarly, if you are looking for a travel agency or plastic bag making venture, you must look for other fundraising sources. Although crowdfunding is one of the best ways through which contemporary businesses can raise money hassle-free, many business ideas may not meet their fundraising goals even after spending on campaigns and other platforms fees.
Crowdfunding fees can impact fundraising goals
Unfortunately, we have many fundraisers and few investors all the time, which means that all crowdfunding events may not be successful. If your campaign does not go well, you may have to face embarrassment or critical acclaim besides struggling for money at the same time. Although crowdfunding itself is a good cause, it comes with a certain prize. Many reputed websites dealing in crowdfunding charge fees to run campaigns. Those who achieve their goals must pay the pre-determined fees as well as other charges before the amount raised through crowdfunding can be collected.
Advantages of crowdfunding
Convenient
The pain and struggle behind raising money can be realized by entrepreneurs themselves, particularly when they have to pitch in front of several investors and spend sleepless nights. Although it requires time and effort to start a crowdfunding campaign too, you need to pitch once and present in front of thousands of investors on one go. The relationship you build through a successful campaign can sometimes provide you with additional support or help to foster your campaign further.
Validates your novel idea
Entrepreneurs are generally thought to come up with novel ideas and focus on building products that can solve societal problems. But, at the same time, they fear whether their idea will be liked or not which makes most of the entrepreneur’s walkout even before they think about raising funds. However, crowdfunding is one way through which entrepreneurs can ask targeted consumers about their idea and in return, they would put their money if it is worth it. After all, no person will invest in an idea that is not worth investing in. In addition, you get valuable feedback, idea and insights that can help you in product development.
Crowdfunding act as a great marketing tool
Undoubtedly, crowdfunding is one of the best marketing tools and a cost-effective way through which you can spread the word regarding your product in front of the masses. Many business companies start crowdfunding at an early stage to reach targeted audiences in a budget-friendly way. Many platforms help aspiring entrepreneurs and small businesses while promoting their campaigns and brand across various channels. As you spend your valuable time with investors, they may become customers, brand advocates, and shareholders in the future and help spread your message further amongst their associates.
