For many entrepreneurs, the challenges of starting a new business do not lie in finding a great idea; it’s more about raising the necessary funds. The number one reason promising startups go under shortly after their launching phase is the financial struggles and inability to cover their costs. However, if you are an aspiring business owner, there’s no need to despair. Your small business is not bound for failure; you can still raise enough funds to keep it afloat through crowdfunding. In this article, you will get to learn more about crowdfunding as well as the pros and cons of this fundraising method.
What is Crowdfunding?
Crowdfunding is a fundraising method where people or organizations choose to support budding business ventures that they believe have the potential to succeed and make profits. In return, investors can either own equity in the new business or ask for exclusive early access to the new product/service. It’s a great way for investors to invest in young talent and cultivate entrepreneurial mindsets in their local community. For over a decade, Kickstarter, which is one of the most successful crowdfunding platforms, has been helping thousands of business owners raise the money they need to turn their dreams into reality. The simple model where entrepreneurs get the chance to showcase their product in front of an interested audience-mostly online-takes away from the rigid setup of investor-hunting.
In order to understand whether crowdfunding is suitable for your business or not, you have to consider both the pros and the cons objectively. Let’s first consider the pros.
● Fast, Easy, and Simple
Preparing for a crowdfunding pitch still needs tons of preparation and dry runs if you want to increase your chance of reaching your target funds as fast as possible. However, compared to more traditional fundraising methods, crowdfunding is definitely simpler, less time consuming, and even cheaper. This is particularly important for an ever-evolving market where the lifespan of new products is getting shorter every day. Crowdfunding can help you move fast and get your business up and running before a competitor cuts you off and shut your business down for good.
● Crowdfunding Can Help You Test The Waters
Unlike big corporations, small businesses can’t afford to spend millions of dollars on market research to understand what exactly the customer wants. Online crowdfunding platforms help entrepreneurs move past this hurdle as they give them the chance to capture firsthand the public’s opinions and first impressions. Even if you don’t end up raising the amount you were seeking, you can use the feedback from your campaign to do the necessary adjustments and prepare for a later launch.
● Mitigates the Risk
There’s a huge risk associated with starting any new business. However, with a crowdfunding campaign, you’ll be able to manage your risk better since you won’t start manufacturing before you have pre-orders and proof that there is enough demand for your product.
● There’s a Good Chance Your Crowdfunding Campaign Fails
Unfortunately, the odds won’t be in your favor since less than one-third of crowdfunding campaigns end up meeting their financial goals. Besides the frustration and the time and money you would lose, your brand image can be distorted before it even gets to see the light.
● There Are Hidden Fees
If you think that you can sign up on a crowdfunding platform for free, you need to dig a little deeper. There are tons of hidden fees that you will have to pay along the way before your crowdfunding campaign can actually happen. From registration fees to credit card transaction fees, you have to account for the extra costs as they will eventually add up. Kickstarter, one of the most popular crowdfunding platforms charges every successful campaign 5% of the total amount raised. Not to mention the credit card processing and transactional fees. As for Indiegogo; albeit slightly cheaper than Kickstarter when it comes to fees for using the platform, it does however charge more on credit card processing costs.
There’s no denying that crowdfunding is an efficient fundraising tool. However, this method of funding comes with its share of limitations and shortcomings. Crowdfunding has proven to be specifically beneficial for new tech gadgets and businesses offering local services. People would definitely get excited about investing in innovative smart clothes or the world’s smallest printer, because this is where the money is. However, you can still raise the funds you need with your more conventional business idea. Just keep in mind that you need to find a unique selling point to get investors hyped up about backing you. Otherwise, you’d find it really hard to raise the money you need.