Crowdfunding is a popular route for businesses that need to raise money these days. Relying on a large pool of small investors that are passionate about your idea is often more attractive than pitching to single investors, especially if you are a creative business with a clear vision. However, there are two sides to this conversation that you should consider before you decide to go down this route. Let's look at them now.
Pros of Crowdfunding
Get funding relatively quickly without many fees
If you are looking to get hold of some funding quickly because your business is growing and you need to invest in it, crowdfunding is an excellent choice. Most crowdfunding sites allow you to collect pledges for a certain amount of time (from a few weeks to a few months). You get to set the time limit on the campaign, so you can raise capital relatively quickly. Plus, while there are transaction fees at the close of the campaign, you don’t have any upfront fees to pay. You'll know well before the fund are distributed exactly how much money you'll be getting from your campaign.
What if you don't raise enough funds? On many platforms you can decide to select an "all or nothing" campaign where the funds are only collected if and when you hit a funding goal. If you fall short, it doesn't cost you (or your pledges) a thing. That way, you're not stuck having to deliver something when you didn't raise enough money in the first place. It's a valuable safety net when you're taking a big risk and trying something new.
Crowdfunding lets you maintain control of your creative vision
When you are starting a business, it’s important that you don’t compromise your values. Unfortunately, investors with a large stake in the business may want to exercise more influence or control over the direction of your projects. Many business incubators have an end goal of selling your company, and that may not be what you want (that's not how we do things in the Creative Freedom Incubator, by the way!). It’s never good when partners clash, especially in a creative business. And don't be fooled, that's exactly what investors are - partners in your company. With crowdfunding, however, people are pledging money for future delivery of a product or to otherwise show support for your project idea. They have zero ownership interest and you maintain full control of your project from start to finish... whatever "finish" looks like for you.
Crowdfunding can help your marketing efforts
Rocketbook, a well-established business, often launches new products to their existing audience through a crowdfunding campaign. By generating a lot of early orders from their existing support base, their campaigns get a lot more visibility on the crowdfunding platform. Crowdfunding campaigns that catch people's attention often go viral. That means exposure to a huge number of potential new customers. Using a Wefunder marketing company to help you promote the campaign increases the chances of success and also helps you capitalize on that marketing opportunity. These kinds of companies can run ads on social media to help draw even more attention and potential investors to your crowdfunding campaign. You don’t get that kind of publicity when you take out a loan!
Cons of Crowdfunding
Crowdfunding campaigns have lots of competition
Although crowdfunding is a good way to get funding quickly, it’s all dependent on your success. The problem is, there are a lot of people out there with their own crowdfunding campaigns and it can be difficult to cut through the noise. Some sites even vet their submissions and may reject your campaign if they don't think it's a good fit for their platform.
Then there's the fact that the campaigns that do the best are generally launched by folks who already have an audience of their own. This is a particular problem for newer creative businesses because there are so many exciting projects out there that already have some traction. It can be challenging to break through the noise or compete with campaigns whose founders already have thousands of followers (and backers). However, it also depends on your budget. If you're not trying to garner millions, or if you work with a crowdfunding marketing agency and create promotional materials that really communicate your vision, it is still possible to get the money you need.
Failed crowdfunding campaigns can damage your brand
According to Crowdfund Insider, Kickstarter campaigns in 2013 had an overall success rate of only 44 percent, while Indiegogo success rates were roughly a quarter of that. The numbers have likely improved since then, but that's still a lot of failed campaigns!
If you opt for an all-or-nothing campaign (which is all you can do on Kickstarter) and your crowdfunding campaign fails, the money that was pledged is returned to your backers. That kind of disappointment can sometimes do damage your brand. Managing expectations during the campaign can help avoid this, but disappointed buyers often don't return to buy again.
Crowdfunding campaigns have the potential for intellectual property theft
Many people find themselves in a difficult situation because they put their ideas up on crowdfunding sites without first filing for patent or copyright protection. Intellectual property theft is a possibility anytime you share an idea, though not all ideas are worth stealing. And copyright law is complex. So even if you've filed the proper protections in your home country, there may be less scrupulous folks on the other side of the world eagerly gobbling up your great ideas. Don't let that dissuade you, though. It doesn't happen a lot, and a good attorney is worth the investment.
Is crowdfunding worth it?
The answer is that it depends. If you've got an idea that's great for the masses and you can break through the noise on one of the major crowdfunding platforms, then yeah. Go for it. If you're a smaller operation, just getting started, and you can launch your project no matter how many backers you get, then it makes sense to use the platform to attract some new backers, but don't expect miracles. In my own experience, however, the campaigns that get the best results are usually from folks who already have a massive audience to support it or the budget to attract enough new backers to make it worth their while. If you're not in that camp, you're better off continuing to do things a more organic way and save the crowdfunding for your next project.