What are the Pros and Cons of Crowdfunding?
Crowdfunding has become quite popular over the past decade. It has a relatively low cost of entry. It made it easy for entrepreneurs to collect finances to turn their ideas into reality and pitch their businesses directly to the public. The accessibility of popular crowdfunding platforms has fueled this revolution in funding. For small business owners or startups, crowdfunding has helped them to sidestep the traditional gatekeepers of small business financing, like venture capitalists and banks.
However, it might look easy for some to launch a crowdfunding campaign that involves a lot of strategic planning. There are many pros and cons that one needs to consider before opting for crowdfunding. Here are a few of them to consider:
Pros of crowdfunding
1. Less financial risk
One of the most significant advantages of crowdfunding is that you can test the waters to see if your idea has merit or not without taking a massive financial risk. You can get the reactions and test the market before spending money on expensive inventory, materials, or development. Crowdfunding beats funding an unproven commercial idea out of your pocket.
2. Centralize communication
Hosting a fundraiser on a funding portal is a huge advantage because you can easily concentrate your investor discussion in a single place. Before you had funding portals, you had to update your potential investors now and then through emails, phone calls, and meetings. It used to be a painful exercise for any company. Whereas, when you talk about centralizing communication, it is not just about emails; it is about giving regular updates regarding your fundraising profile so that all the prospects can look into every new detail. This can be regarded as proactive marketing.
3. Viral campaign
Crowdfunding campaigns have various strategies, and it is essential to choose the medium of your campaigns. Social media platforms are trending nowadays, and people of all age groups are available on one social media platform. It is possible that on any of these platforms, your campaign could go viral. Once it happens, exposing your product to several people would be beneficial for your campaign because word spreads quickly on such platforms.
4. In control of equity
If everything works well, your crowdfunding campaign will succeed. And when it does, you will have to deliver the rewards to your backers. These will be the people who have invested in your campaign. These investors will be rewarded with the perks. But the advantage will still be yours because you will not have to give any equity or lose control over your company.
5. Creating momentum
Small businesses and startups need momentum. Crowdfunding is a good platform where one investor can become interested in your deal by looking at another investor interested in it. The more people willing to invest in your deal, the more likely others will also invest. It is regarded as a herd mentality. Investors will get comfortable by looking at others investing in the same idea.
Cons of crowdfunding
1. It is not free
Crowdfunding may look easy to many people; however, it requires a lot of time and money. Starting a crowdfunding campaign means investing a lot of money in creating persuasive content, making appealing videos, building prototypes, and effectively marketing the materials on various platforms. Hence, to gain financial help from investors around the globe, it is crucial to invest a little bit first.
2. Lack of investors
Many people think that crowdfunding finds people to invest in your project. However, it is entirely untrue. Crowdfunding campaigns do not get money showering from the skies. There is a direct correlation between the number of outside links to a crowdfund and the fundraiser’s success. Most of the time, the Founder must work their networks to create a buzz around their projects.
3. Beware of scammers
There may be almost no way to detect whether a crowdfund is genuine or a scam. The crowdfunding space is full of scammers from all around the place. Many projects ask investors to fund, but in the end, they do not pull through. Such scams will get your money and will never execute the project.
4. It Takes time to prepare
A crowdfunding campaign is not an easy one to prepare for. You must not only invest a good amount of money for the initiation but will also need to have a lot of time on your hand to make proper preparations for the campaigns. You must ensure that you run promotional ads, compile emails, and gain the necessary exposure for your project before the launch. Several things need to be taken into account before launching a crowdfunding campaign.
5. Negative feedback
Trolling is very common in today’s digital world. There are several social media platforms where you can receive anonymous trolling from people with fake names to demoralize you. Negative feedback from people can be very disappointing for small businesses and startups. Beware of such rough criticisms by people on social media, and keep a firm focus on your project.
There are several cons of crowdfunding, but on the other hand, there are many pros. Raising money may be difficult at first, but if you have a good idea for your project and a few good investors, your project can succeed despite all the barriers. Hence, crowdfunding can be worth a shot for the right kind of startup. The only thing that matters is to do proper research and work hard for your campaign. Therefore, be aware of the pros and cons of crowdfunding while planning for your next campaign.