You might have heard of the recent startup Luxe, a “public valet service for city drivers”. Or you might have heard of Fobo Tire, an app that instantly lets you check tire pressure. Or maybe, if auto isn’t your thing, you’ve heard of The Dash, the worlds first smart in-ear wireless headphones. All these companies, like many others, have one thing in common – they being came into fruition through the ever-popular means of crowdfunding. These days, more and more entrepreneurs turn to alternative funding to gain investment into their business ideas. In fact, trends show that Crowdfunding is to surpass venture capital funding by 2016.According to Forbes, in 2014, approximately $16 billion was crowdfunded. With all this in mind, it’s no wonder that more and more people turn to crowdfunding as a means of funding. But this alternative funding method has its fair share of disadvantages. If you are an entrepreneur considering turning to crowdfunding, consider both the pros and cons of the same before engaging in this method of funding:
There is a lot of risk associated with starting a startup these days. Crowdfunding is a good way to hedge these risks. Entrepreneurs get continuous feedback and market validation through crowdfunding, and so they are saved from going all in and taking a product concept that may fail to the market.
An active crowdfunding campaign is a good way to boost marketing. You will be able to reach numerous channels through social media, and tap in to your backer’s social media to gain publicity. Many crowdfunding platforms incorporate social media mechanisms, making it extremely easy to get referral traffic to your website and other social media pages.
Building a Customer Base
A crowdfunding initiative is a great way to build up a loyal customer base. Crowdfunding allows an entrepreneur to share not only the product, but the purpose and idea behind it. People who invest and back the entrepreneurs’ campaign obviously believe in the product as well as the success of the startup in the long run. This means that they will be retained as customers, and even help spread the word about the campaign to see it come into being. In this way, by reaching people who are interested in the campaign, a crowdfunding initiative is likely to buildup a base of customers who will stay loyal in the long run.
Tanya Prive in an article on the benefits of crowdfunding states “The momentum created by successful crowdfunding campaigns attracts potential investment from traditional channels and attention from media outlets”. This means that when a campaign is successful, media is always keen on reporting about it. In this manner, crowdfunding, being a hot topic these days, gains you a lot of free publicity.
More Than Normal Workload
Crowdfunding is a lot of work. It takes months of preparation, starting from the effort involved in putting together an attractive project, to creating prototypes, professional videos and more. Sometimes, this time and effort isn’t worth the amount of money you are aiming to raise.
A crowdfunding campaign often is accountable to the investors. This makes sense, as the investors are the ones who have spent their money. This sort of accountability can be quite challenging in the long run, says Andrew Scharge, co owner of Money Crashers Personal Finance, as stated in an article on Tech.Co
It’s very important to have the necessary copyright and trademark protections in place before publicizing your campaign. Since a lot of crowdfunding is done through Internet platforms like Kickstarter, Indiegogo, FundersClub etc., there is no guarantee that your idea won’t be stolen.
Limited Leeway with Funds
A lot of crowdfunding campaigns are conditional. What this means is that something is promised in return for a certain amount of money. Often, due to these various commitments, one doesn’t have enough funds leftover to use as capital for growth. You will often merely have funds only to finish production.
Depending on which country you are in and the nature of your business, you have to be aware of the various laws and regulations, tax implications and reporting requirements of your startup. For example, in the EU, there has been a movement to add VAT (Value Added Tax) to crowdfunding rewards. This would deter people from wanting to donate, as they would have to pay extra taxes. Similarly, in the US, the latest draft of the SEC states that you will have to have your finances audited formally and file a final report with the SEC, which involves a lot more paperwork. If the campaign is only for a small amount of money, then the hassles as per location may not be worth it.
Before engaging in a crowdfunding campaign, it’s good to keep both sides in perspective. Consider both the pros and cons in terms of the depth of your project, and make sure to research all the facts before proceeding!