Pros and Cons of Crowdfunding
New businesses often have difficulty getting funding. They often don’t qualify for business loans unless their owners have great credit and sign on to pay the loan if the business cannot. Therefore, these professionals seek out new funding opportunities, and many have found crowdfunding. However, there are both advantages and disadvantages you should know before pursuing this financing option.
The first challenge in a successful crowdfunding campaign is the time it takes to prepare. First, you need a prototype. You should also have videos, explanations, and advertisements on the product. You may also need to create contribution rewards and tiers. You also need to be available to answer questions quickly. Therefore, these campaigns have high time requirements.
You also need to understand the rules of the platform, and because your information is available to the public, other companies or individuals can imitate or create products based on your designs. Your campaign is also short, typically 30-60 days, so you may not have the time to get the money you need.
In addition, only 39% of businesses receive the full funding they need. You may also experience significant fees and upfront costs. The platform takes 5% or more of the money you raise, and you may also have to pay for the development of your marketing materials.
A significant advantage of this fundraising type is that your risk can be mitigated based on how you run your campaign. In addition, the money you invest in marketing is not lost forever because your materials can be used on other platforms. Therefore, you have relatively low risk. Any money you make is yours; as opposed to a business loan, you don’t have to pay it back.
Because you are on a platform with individuals who are interested in new products, you gain valuable exposure from an established audience. You will learn whether your concept is a good one that appeals to a wide audience. A successful campaign can also boost your momentum and attract attention from media, social media, influencers, and major investors.
You can build your target market and collect feedback on your product while you are fundraising. You also don’t have to give investors equity in your company. In addition, you can provide rewards that don’t have a high cost, such as access to the first products produced, discounts, or company memorabilia. You can even offer a thank you on the company website.
Crowdfunding offers unique opportunities for company financing, but be sure you understand the pros and cons and develop a plan to improve your success.