Market Overview

Is Crowdfunding The Best Way To Fund A New Business?


With over $34 billion raised by businesses across the world on online crowdfunding platforms, funding a business via the crowd is now firmly a mainstream option for budding entrepreneurs.

Last year, businesses raised more money through crowdfunding than from venture capitalists. Reaching out to a massive audience of strangers to pitch in small amounts is now as popular as obtaining a business line of credit or asking friends and family for startup capital.

However, crowdfunding isn’t a silver bullet for the financial challenges of launching and sustaining a new business. Despite its obvious advantages, this form of funding simply isn’t a good idea for certain types of businesses or entrepreneurs. Here are some of the pitfalls of crowdfunding that entrepreneurs need to consider:

Too many investors
Gaining investments in your business isn’t just about the money. Raising funds from the outside brings in stakeholders who have an equal say in how the business is operated. Most small business owners reach out to angel investors who know their industry well so that they can open new doors for them. Reaching out to the owners of a restaurant chain, for example, could help a food business get its foot in the door.

However, with crowdfunding, the number of investors with a stake is drastically higher. The chances of an experienced industry insider offering specific opportunities is rare when there’s hundred or thousands of investors who have spent small sums to gain access to your time and attention. For some business owners, working with a crowd is simply too much effort.

Managing expectations
There’s more to crowdfunding than simply listing a business on a platform like Kickstarter or Indiegogo. You need to prepare for a campaign well in advance and make sure you’ve done your research. Once you’re ready, you need to launch your crowdfunding campaign alongside a massive marketing and PR drive to make sure you gain the required funds. Once the fundraising is over, you are perpetually locked with the crowd and have to manage expectations of thousands of people who now have a stake in your future. Managing individual expectations could be tiring.

Crowdfunding is relatively new and somewhat unregulated at the moment. The JOBS act does make it a lot easier to raise funds in this way, but some of its provisions might scare potential entrepreneurs away. For example, certain provisions in the JOBS act could open up directors and officers in the company to personal liability, leaving them exposed to shareholder lawsuits if things should turn sour. The law could change and be modified as time goes on, but for now entrepreneurs need to dig into the finer details before they launch a campaign.

Drain on resources
Managing a crowdfunding campaign is expensive. After the platform has taken its cut, you only have a limited amount of time and capital to deliver what’s promised to all your funders. If your business sells a physical product, taking care of the logistics, packaging, and manufacturing is an intense drain on your resources. Meeting the demands of more backers than you expected could prove stressful.

Crowdfunding is an exciting new way to launch a business. Not only does it allow you to create a network of loyal supporters, but it also helps you fund your dream with ease and little starting capital. However, be aware of some of these pitfalls if you’re planning on raising funds this way.

The preceding article is from one of our external contributors. It does not represent the opinion of Benzinga and has not been edited.

Posted-In: General


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