Crowdfunding is a capital procurement technique whereby you look to raise small amounts of money from a massive group of individuals via an online platform or avenue. You’re essentially looking to raise capital for a business venture by getting funds from several different individuals instead of one specific financial institution.
It’s a great way to raise capital, but it also has its own disadvantages. Here are some pros and cons of raising capital through crowdfunding you should keep in mind.
PROS:
Convenience
The Internet allows you to raise capital via crowdfunding campaigns any time you want, no matter where you might be. Also, these online platforms will offer to several fast-growing business communities that are interested in supporting new ventures.
Alternative to Financial Institutions
Crowdfunding is an excellent way of bypassing the need to go borrow from a bank or financial institution. It can be extremely hard to get bank credit for startups and SMBs. Most traditional financial institutions don’t want to take that kind of risk. Crowdfunding gives you access to several different kinds of donations.
Control Over Decisions
One of the disadvantages of getting money from angel investors and venture capitalists is the risk of losing control over major decisions that involve the company or business. Of course, this goes without saying, seeing as how they’re the ones taking the most risk. However, crowdfunding doesn’t require you to surrender such rights.
Helps Build Momentum
Driving investments into your startup or SMB will require some momentum. Most people will need to hear and see other people talking about investing in the company before doing so themselves. Crowdfunding platforms will give you the chance to showcase how interesting what you have to offer.
Choice of Platforms
With their online accessibility and increasing popularity, more and more folks want to try out crowdfunding. But, like with many other things in life, there’s higher supply when there’s more demand. This is why many different crowdfunding platforms are popping up and specializing in different niches. This means that you can select from a wide variety of platforms and pick one that’s suitable for your needs.
CONS:
Inflexible
The major disadvantage of crowdfunding is that you can’t alter or configure a campaign once you’ve launched it. This means you can’t modify the terms and conditions (or description) and completion dates/times. Making changes to a campaign might render it null and avoid, and you might even have to refund investors.
False Negative
Another huge disadvantage of crowdfunding is the conclusions arising from false-negative results, especially when analyzing idea validations. For instance, you might conclude that the product or service didn’t meet market requirements that’s why the project failed. However, the truth could be that poor marketing is what led to this failure.
Accounting and Administration
There are certain accounting and administrative challenges you’ll face with crowdfunding. As a campaign creator, you’ll need to make sure you accurately track how many shareholders you have, investor contributions, and so on. Furthermore, you’ll need to keep updated books to ensure all your investors get the profits they’re each entitled to get. You’ll also need to communicate with your investors regularly.
Idea Theft
Arguably one of the scariest things about public crowdfunding campaigns is the risk of someone stealing your idea. Copycats can easily swoop in, steal your idea and then take it to other corporations or investors. However, you can avoid this by protecting your intellectual property.
Like with most things in life, crowdfunding has both a good and a bad side, as you can see. Even though it may not be for everyone, it can provide a lot to Startups and SMBs.
Check out No Money To Start Your Business? Here Is How To Crowd Fund And Get Customers In The Process
How to Protect Your Business Idea When Pitching To Investors
