Is Crowdfunding Right for Your Small Business?
With reward-based crowdfunding, instead of giving up equity, you can offer a reward to the people who donate to your campaign. Often, the reward will vary depending on the size of the donations.
In recent years, crowdfunding has seen astronomical growth. As of 2018, there were 375 crowdfunding platforms
in North America. Yet, despite the popularity of crowdfunding, it’s not right for every business owner.
To ensure that you can judge whether crowdfunding is a good fit for your business, we’ll review the pros and cons of this type of financing.
Pros of Crowdfunding
1. No Need to Give Up Equity
As a financing tool, crowdfunding is unique in that you won’t have to take on any debt, nor will you have to give up shares of your company. As mentioned in the introduction, crowdfunding is based on a reward system. That means, in exchange for their investment, you’ll offer your investors a reward which could be anything from a postcard to a prototype of your product.
Of course, to properly incentivize potential investors, you’ll need to think of a reward that’s affordable but will also provide enough motivation for someone to invest. In other words, even though you won’t have to give up equity, there’s still a cost.
2. Your Company Will Get Significant Exposure
Internet users love a good crowdfunding campaign. Beyond the benefit of receiving money, if you run a captivating campaign with a strong message, chances are that you’ll gain a lot of exposure.
Holding a crowdfunding campaign will be helpful in introducing your company to new customers, but it could also help you improve your business. The people who invest in your crowdfunding campaign are likely very interested in your business, so they could provide feedback, which can help you improve aspects of your business.
3. Limited Downside Risk
With just about any kind of financing, there is an inherent downside risk. For example, if you take out a loan
or secure equity funding, there’s the chance that you won’t be able to repay that money, which comes with consequences.
However, with a crowdfunding campaign, your downside is limited to the small amount of money it takes to get your campaign set up, and any time or resources you pour into the campaign itself. Of course, that doesn’t mean there’s no risk, but compared to most traditional forms of financing, the risk of crowdfunding is fairly low.
Cons of Crowdfunding
1. The Average Funding Amount is Low
According to Kickstarter
, the average amount raised from a crowdfunding campaign is less than $10,000. Fundable
, another crowdfunding platform, cites $7,000 as their average crowdfunding amount.
Although having $7,000 to put towards business expenses will be helpful, for most small business owners, that amount of money won’t go very far. In fact, the average cost of starting a new business from scratch is $30,000. Plus, the SBA’s average microloan comes in around $13,000, which is almost double the amount of Fundable’s average crowdfunding raise.
2. If You Don’t Meet Your Campaign Goal, You’ll Receive Nothing
One of the toughest parts about a running a crowdfunding campaign is that if you fail to reach your goal, you receive nothing. That means you could devote months of your time and energy to a crowdfunding campaign that results in nothing but some exposure.
Ultimately, most crowdfunding campaigns fail. According to Big Commerce
, just 40 percent of campaigns reach their goal, so if you require your campaign goal in order to start your business, you might benefit from seeking a different type of financing.
3. You’re Raising Funds from Unsophisticated Investors
points out, in a crowdfunding campaign, your investors are usually not sophisticated. This means they aren’t profit-oriented like a bank or equity investor. This can be an issue because instead of attracting funding based on a sound business plan, you could receive funding just because you effectively appealed to people’s emotions.
That might sound like a benefit, but in the long run, you might wish you had the scrutinizing eye of a profit-oriented investor to give you real feedback on the viability of your business.
Despite what you’ve seen and heard, the company that makes its fortune by starting with crowdfunding is the exception, not the rule. Of course, crowdfunding can be effective, especially if the benefits of exposing your idea to the public and generating interest is as important to you as the money itself.
However, if your primary concern is obtaining funds quickly, and you’re not interested in the fringe benefits of crowdfunding, other types of financing will be more likely to help you reach your goals.