Crowdfunding: Is it a Viable Option for My Business?

Crowdfunding: Is it a viable option for my business?

What is it and how does it work?

Crowdfunding entered the scene as a viable financing option in the late 2000s. Until then, entrepreneurs looking to get their businesses off the ground sought funding from major investors - but gaining access to capital through banks and VCs proved challenging for many new ventures.

Crowdfunding offers a different and sometimes easier avenue for obtaining seed funding. In crowdfunding, many individuals invest small amounts of capital which, when pooled together, provide start-ups with the early-stage capital they need. On the investor side, crowdfunding empowers individuals to fund a company they believe in and to benefit from its growth.

To be successful, crowdfunding – done primarily through social media platforms - must engage the crowd by building buzz and motivating individuals to be early adopters. A successful campaign also gauges and builds market interest in a product by connecting the company with potential customers. In fact, some become early-stage investors and brand ambassadors.

A potentially win-win arrangement? Yes! What risks are involved in crowdfunding from both the entrepreneur and investor perspectives?

What Are the Benefits and Risks to the Entrepreneur?

Benefits: For an entrepreneur, the main benefit of crowdfunding is the ability to raise seed money relatively quickly - outside the conventional sources of funding and without forfeiting control of the company.

The crowdfunding system is inherently a market validator: If people are keen to invest, it’s a good indicator of the product’s market potential.

Also, as the large number of investors want to see the company succeed, they’ll use their networks to promote the venture and provide key feedback to keep it on track.

Risks: Before launching a crowdfunding campaign, an entrepreneur must create interest in the product – a process that takes significant effort. If the threshold isn’t met, pledged funds are returned, leaving the entrepreneur without compensation for time and resources invested. Failed projects also risk damage to the reputation of the business.

The rewards structure must be figured carefully or too much of the business will be given away to investors.

Additionally, because crowdfunding relies on wide exposure, innovative ideas can be stolen unless the concept has been protected by copyright or patent.

What Are the Benefits and Risks for the Investor?

Benefits: Because investment minimums are low, crowdfunding makes opportunities accessible to almost everyone and enables people to invest in multiple, diverse ventures. Its transparent investment process empowers investors to make informed decisions. As it isn’t linked to financial markets, crowdfunding remains relatively stable during uncertain economic times. Beyond financial interests, via crowdfunding, an individual can help support an innovative idea and join an international community.

Risks: Many new businesses fail, and a crowdfunded venture can be particularly high risk. Unlike traditionally funded start-ups, they aren’t always guided by seasoned professionals. These are often long-term investments, with investors unable to sell their shares or withdraw their investments quickly. Profits are often reinvested to facilitate further growth, and investors may not see rewards for a long time. Due diligence is essential! While online forums are well-suited for crowdfunding, they also make scamming easy.

To sum up… while crowdfunding offers unique opportunities for both the entrepreneur and the investor and has the potential to be a win-win situation from both perspectives, there are inherent risks. Risks can minimized from both sides with thorough research, expert guidance, and prudence.

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