Nowadays, a growing number of artists and start-ups are taking advantage of the crowdsourcing phenomenon that is also known as crowdfunding. Crowdfunding refers to the joint collaboration of people who network together and share their funds on the internet to aid efforts that are initiated by individuals or organizations. Crowdfunding is utilized to fund a variety of different activities, such as aid to victims of disasters, the support for musicians through fans, as well as political campaigns, start-up film productions, companies and software development for free.
It is evident the huge potential in crowdfunding. Crowdfunding gives more people the chance to realize their ideas and hopes become a reality. Kickstarter has collected $574 million since it was launched at the beginning of 2009. In the past six months, Kickstarter was able to raise $203 million dollars, and it appears to slow down. Furthermore, other crowdfunding websites like Indiegogo, Crowdfunder, RocketHub and Crowdrise are on the journey to the same levels of development and achievement.
While crowdfunding may seem like the perfect startup’s dream that is realized, a smart enterprise owner should take into consideration both the advantages and disadvantages prior to choosing to use this method of raising capital.
The Pros
Entrepreneurs from all over the world have shared their experiences with the challenges and issues of obtaining capital to fund new ventures. Crowd-sourced financing is an excellent alternative to obtaining venture capital because it allows users to make the investment without having to give up equity or accruing debt. In contrast, business owners can offer items or gifts to the community of funders to obtain capital, often referred to as reward-based crowdfunding.
Additionally, crowdfunding platforms are an excellent way to promote a new venture and create awareness. These platforms are generally cost-free and offer an array of opportunities to connect with many people. For instance, companies can promote their brand and mission via social media as well as word of mouth as well as increase the number of referrals to their website.
One of the greatest benefits of crowd-sourced financing is the ability for companies to get feedback from consumers earlier during the process. Businesses that are successful use suggestions from customers to improve their products, processes, or services. However, often these adjustments occur too late, and the company can fail. Crowdfunding can alleviate this stress as it lets entrepreneurs gauge the reactions of customers, develop the ideas for their customers and test their product before it goes on the market. In addition, it prevents the company from suffering a huge financial loss, but it shows that the company is prepared and willing to listen to its customers from the beginning.
The Cons
While crowdfunding offers a wide variety of advantages but there are disadvantages also. In particular, this funding method exposes the idea of an entrepreneur as well as detailed information about the business to competitors. This increases the likelihood that an idea of the owner could be copied or stolen, particularly if the competitor has better funding.
Another downside to crowdfunding is that it’s not an effective method of long-term funding. Although it’s ideal for financing smaller, one-time projects, it’s not the best option for creating a steady flow of funds. But, businesses can utilize crowdfunding as a way to raise money, for instance, the need for a particular project or, for example, a promotion.
Furthermore, the amount an enterprise can raise is also limited. Crowdfunding limits the amount of money that can get raised to $1 million over any 12-month time frame. This is a major drawback because most new businesses require more than that in order to start. This is why most companies will benefit more from venture capitalists or angel investors in the event that they need large amounts of capital.
Although there are many advantages of crowdfunding, including more capital access as well as better brand exposure and direct feedback from consumers, However, it’s best to approach the process cautiously. It is crucial for entrepreneurs to evaluate the benefits and drawbacks of this strategy prior to making any decisions regarding fundraising strategies. Remember that crowdfunding exposes your ideas to competition, limits the amount that can be raised and is not a reliable method to continue to raise capital. After having taken into account these aspects, you can proceed with confidence that you’ve chosen the best option for your company.