The Advantages and Disadvantages of Crowdfunding for Entrepreneurs

If you need capital to get your business started, you might turn to crowdfunding to raise those funds. Reaching out to venture capitalists and angel investors is stressful; you’ll need a pitch deck, there’s no guarantee you’ll get the funding you want, and even if you do, you may have to give up a portion of your ownership or control of the company in order to get it.

As lucrative as crowdfunding is, it isn’t the perfect solution for every entrepreneur or business; and you’ll need to familiarize yourself with the advantages and disadvantages before you make your final decision.

A brief overview

Crowdfunding is the process of gathering money for your business via multiple contributors through a platform like Kickstarter or GoFundMe. Each platform has different requirements, but in most cases, you’ll create a project for your business, request a specific amount of funding, and rely on individual donations/contributions to meet that goal. You may also then offer rewards to those contributors at specific donation levels, such as giving them a free product when they contribute $25 or more as an incentive.

Related: The New Revolution for Women Entrepreneurs: Crowdfunding Hacks

The advantages

Let’s start by analyzing the core advantages of crowdfunding:

  • Speed and accessibility: You don’t usually need any special qualifications to start a crowdfunding campaign, nor is it especially hard to create one from scratch. Within an hour, you can get the basics of your page outlined, then immediately make that page visible to the crowdfunding platform’s audience. You don’t need to give presentations or hunt down specific venture capitalists, nor do you necessarily need a business plan to get started (though it’s still a good idea).
  • Marketability: Once your page is established, you can greatly increase the number of people you reach (and how your product is viewed) through any number of marketing strategies. You can master search engine optimization (SEO) to make your page rank higher for relevant online searches, create videos that show off how your products work, or even rely on paid advertising to spread word about your brand. There’s practically unlimited flexibility here.
  • Feedback and community: When you launch a crowdfunding campaign, you’ll be sharing your product and business idea with the very people you’re trying to sell to—and that gives you an important opportunity for feedback. Early contributors may point out weaknesses in your idea they’d like to see fixed, or come up with ideas for new features that can improve your model even further.
  • Full control: Unlike with conventional investments, you won’t have to forfeit control of your company when raising funds. You get to decide how to structure the campaign, including how much to ask for, and then decide how you want to run your company if/when you get it.
  • Customer attraction: Marketing your crowdfunding campaign is a way to build early momentum and interest in your brand. For example, by the time Pebble Time got to market, it already had tens of thousands of loyal fans. Think of it as an in-depth market test to see if your idea is viable.
  • Choices: There are dozens of crowdfunding platforms available to you. If you don’t like one, you can seek out another. You’ll also have a variety of options for how to structure your campaign, such as which rewards to offer at which levels of contribution.

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The disadvantages

There are some disadvantages, however:

  • Scrutiny and rejection: Just because you have a solid idea doesn’t mean it’s going to be accepted by your crowdfunding platform of choice. While some crowdfunding platforms are open and easygoing, some of the more popular platforms (like Kickstarter) have notoriously detailed rules for what’s allowed and what’s not. If you don’t meet all their requirements, your campaign might never be seen.
  • Competition: Assuming your campaign is accepted, you’ll face some stiff competition. Crowdfunding is incredibly popular because of its inherent advantages, and because it’s so accessible, there are countless projects going on in any major platform at any given time. Finding a place for yourself requires a detailed plan of attack, and a clever way to differentiate yourself from your closest competitors.
  • Meeting the threshold: On some crowdfunding platforms, you’re required to set a threshold for your brand—a goal that, if met, will deem your project “funded.” The downside here is that if you don’t meet that threshold, you won’t get any of the money—even from people who have already pledged a donation. Not all crowdfunding platforms have this all-or-nothing system, but it’s prevalent enough to be worth your consideration.
  • Fees: Most crowdfunding platforms will take a percentage of the contributions you raise. These fees are minimal, but may still reduce the amount of money you’d otherwise get.
  • Leaking valuable information: You may also run the risk of leaking valuable information about your product. For example, showing off a prototype online (before you file for a copyright or protect your ideas in other ways), can open the door to copycats. This was the case with Fidget Cube, a novelty item that became popular after emerging on Kickstarter. Within a few months, manufacturing companies in China had designed a fleet of similar products, and were selling for far less than the price of the original Fidget Cube.
  • The risk of failure: If you’re turned down by a venture capitalist, you can always seek out another VC. But if your crowdfunding campaign fails, it can be hard to recover. A failed crowdfunding campaign is a sign that your business plan isn’t good enough—at least to the majority of VCs and angel investors. Plus, most crowdfunding platforms won’t allow you to list the same project twice. Accordingly, the consequences of failure are severe.

Crowdfunding isn’t right for every business or every entrepreneur, so consider your options carefully before proceeding. Understanding the strengths and weaknesses of crowdfunding, and designing a campaign to compensate for them, can maximize your chances of success.

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