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Crowdfunding a startup: The Pros and Cons

Put simply, crowdfunding, derived from the term “crowdsourcing”, is the process of raising capital from a vast network of people for a startup or for expansion of a business using different platforms. A successful crowdfunding campaign can prove to be highly beneficial in providing funding within a short span of time while allowing people to get involved at the ground level of the business. As with everything, there’re certain advantages and disadvantages of crowdfunding. Here’re the key ones of them.

Pros:

Cash infusion

It’s quite common for startups to experience huge difficulties in arranging funds. An effective crowdfunding campaign can save you from doing endless rounds of financial institutions. In addition, this simple way of much-needed cash infusion allows you to focus on other key elements related to your business.

Fast access to capital

In general, it takes substantially higher time to raise capital, especially for a startup, through traditional means. On the contrary, a strategic crowdfunding campaign eliminates the need of continual pitching, prospecting, negotiating etc which are the cases when you try to get funds from banks or other financial institutions. Additionally, you don’t necessarily need to give up equity in the company. Instead, you can offer reward-based incentives to the investors.

Market validation

Market validation is one of the most advantageous aspects to try crowdfunding over other ways of raising seed capital. Surely, you’ll get good feedback from your family and friends on the idea and prototype but most likely, those will come in a supportive form, which mayn’t be ideal at the initial stage. What you’ll actually need to learn is whether absolute strangers will be willing to invest their hard-earned money to purchase your products or services. Through crowdfunding, you’ll be able to pre-develop a successful concept, lowering the initial risk to a good extent.

Effective marketing strategy

When you organize a crowdfunding campaign for your startup, you’re effectively promoting your concept to others at the same time in addition to seeking capital. Once you’ve the required funds, you’ll be able to draw a clear picture about how to organize your marketing strategy more effectively. In short, the clarity of your message the helps you receive the funding will also let you attract prospective customers.

Exposure

Despite you doing a lot of work and driving the bulk of your personal exposure, most of the well-known crowdfunding platforms do offer the legitimacy of having been evaluated so that you’ll become exposed to their community. And that one can prove to be a highly engaged community, who’ll spread the word about your business. Raising capital through other traditional means doesn’t provide you with this additional manifestation right off the bat.

Customer base

Finding customers initially often seems to be a tough task for startups. When you’ve raised capital through a crowdfunding campaign, you effectively have a large pool of people backing your products or services. As a result, many of the investors don’t just become your customers, but also act as extensions of your sales team as they promote your business. This helps in attracting new customers and keeping them engaged to a great extent.

Critical inputs

Just as the investors in crowdfunding give you feedback on whether you’ve a promising business model, they also offer highly valuable inputs on whether or not your products or services are likely to perform as promised. You can expect to receive questions, comments about your offerings as well as suggestions for improvements to make your product or service more adaptable to or useful for certain situations.

Cons:

Some considerations to remember, which can put a pall on your crowdfunding effort.

It’s hard work actually

To succeed in your crowdfunding campaign, it’s just not enough to fill out a couple of forms online, hit posts and raise the money. Every aspect of your campaign has to be perfect – from thoughtful marketing, a highly engaging video to getting various other elements lined up. It requires a lot of expertise and extreme hard work to design as well as implement successful crowdfunding campaigns.

Negative effect on future financing

For any reason, if your crowdfunding campaign falls short, it may stay on the site permanently and be accessible by potential investors in future. In addition, they can also clearly identify how much you failed to rake in and the quality as well as lack of it in your campaign.

All or nothing

Some crowdfunding platforms seek out pledges and accumulate money from your investors only if you meet the stated goal set by you. In other words, if you declared to raise $20,000 and you raise $19,900, you may receive nothing in the end. Hence, it’s extremely crucial to set a realistic goal that also gets you the expected result.

Little room for growth

As a majority of the crowdfunding campaigns depend on rewards, each dollar comes with a real near-term commitment to generate and deliver something. This generally leaves you with just sufficient funds to manage production, but not adequate to grow the business. Ideally, you should think wisely and try to generate some amount of buffer to ensure you keep going and have time to identify the sources of your second round of funds.

Final note

Before taking the final decision on a crowdfunding campaign for raising capital for your startup, consider these pros and cons thoroughly to increase your chances of success. Ideally, you should consider discussing your idea with an established firm, who’ll be able to give you a clearer picture of the ins and outs of crowdfunding and make it work for you.

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