Today’s business owners and startup founders have an option for raising capital that can help increase their odds of success and build their customers from the very beginning: crowdfunding. While many people are choosing to jump on the crowdfunding bandwagon in an effort to get their products and ideas out to the masses, there are some serious pros and cons that need to be considered before you decide whether or not this is a viable option for your business.
How Does Crowdfunding Work?
Crowdfunding means putting your project idea out there and asking people to sponsor you. It can help you raise capital quickly and effectively–but how does it work? There are three major types of crowdfunding:
- Donation crowdfunding, when individuals invest in the business because they believe in what it can accomplish.
- Debt crowdfunding, which works in a very similar manner to loans from a bank but simply comes from individuals instead.
- Equity crowdfunding, when, in exchange for their donation, individuals receive equity in the business.
Typically, crowdfunding allows you to raise capital quickly, which can be useful when you have a product idea that you’d like to get off the ground in a hurry. As interested parties donate, you track the funds you’ve raised and see how close you are to accomplishing your goal.
You need funds, and you need them before you can get your business off the ground. Is this type of funding the right option for you? Consider these key benefits:
- Crowdfunding is fast–typically much faster than raising the same amount of money through bank loans.
- Crowdfunding allows you to start building your customer base before you ever start pushing out your product.
- You can spread the word further through social media, helping more potential customers find out about your business.
- You’ll get a wide range of feedback about your project while it’s still in the concept and design stage, giving you a chance to refine your product.
- Some platforms will allow you to create crowdfunding options without giving away equity in your business, which will allow you to maintain more control over your business in the future.
While crowdfunding offers a number of key benefits, it does have its drawbacks. Before deciding to take a leap and crowdfund your startup, make sure you understand the potential cons to the decision.
- You may not be able to do it halfway. Many platforms hold the funds donated until you reach 100% of your goal–so if you don’t raise it, you’re still stuck in limbo.
- You can’t predict whether or not your idea will appeal. It’s difficult to predict the types of projects that people will be eager to invest in or how their desire to invest will manifest.
- Some types of businesses–particularly those aimed at solving problems for other businesses, rather than individuals–may struggle to raise capital through this model.
- Crowdfunding is a lot of work. There’s a page to set up and maintain, not to mention the need to attract people to your business–and there’s no guarantee of return for your efforts.
- Once you’ve reached your goal, you need to deliver fast–especially if you’re using a platform that allows people to purchase products ahead of release in exchange for their contributions. This can be problematic if you run into snags along the way or fail to deliver on customer expectations.
Is crowdfunding the right choice for your business? It depends on a wide range of factors. Carefully considering those factors before you jump in will help ensure that you’re more likely to make the right decision for your business. Need a financial advisor to help go over the pros and cons? Contact us today to get advice from a virtual CFO who is just as invested in your business as you are.