The Pros and Cons of Crowdfunding for Business

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Crowdfunding is becoming an increasingly popular way for startup businesses and more mature firms to raise money. It seems easy: just sign up with a high-quality crowdfunding platform, list your funding needs, click a few buttons and ​poof! You've raised moneyOf course, raising money for your business via crowdfunding isn't that easy. Like any marketing or fundraising campaign, it requires a sound strategy and solid execution.

Rewards-Based Crowdfunding

Sites like Kickstarter and Indiegogo are called rewards-based crowdfunding platforms because companies or people who fundraise on them provide incentives (rewards, really) to donors who donate their money to worthy projects or companies.

It sounds easy: post your funding needs up on a website, offer some small rewards, and poof! you're on your way to a successful fundraising. Of course, it's not that easy. Getting hundreds—or thousands—of people to donate to your project requires the same attention, planning, and execution as any successful marketing or fundraising campaign. Here's how it works:

  1. Set funding goals: Determine how much money you plan to raise with your fundraising campaign. This is a very strategic decision because many platforms function as all-or-nothing fundraising. That means, if you don't hit your fundraising goals, you don't see a single dollar.
  2. Devise a reward strategy: Giving the right reward—the right incentive—can be the difference between hitting your funding goals or missing them. So, devise specific tiers of rewards for smaller donations ($5-$50) and larger ones (>$50). Get inside your donors' heads and figure out what's going to motivate them without breaking your piggy bank.
  3. Post your campaign to a crowdfunding platform: Prepare your materials, a sweet video (those crowdfunding videos are becoming the infomercials of our age and are really important for successful crowdfunding), and your rewards. Then, publish them on the crowdfunding platform of your choice.
  4. Get social: It's really important not to rely on your platform of choice for bringing in your donors. Research has shown that there's a direct correlation between the strength of your social media outreach and success in crowdfunding.
  5. Take in your money and get ready to deliver the rewards: If you hit your target, you'll receive your money. Now, it's time to start building whatever it was you raised money for. Your donors are waiting.

Pros of Rewards-Based Approaches

  • Access to "cheap money." Using rewards-based crowdfunding, you're raising money for your project or business without selling off an equity stake in your business. These are donations. And to boot, you get tens, hundreds, or even thousands of people committed to the success of your campaign. That's really valuable.
  • Pre-funding your next product. This type of crowdfunding is a great way to lay the groundwork for your next innovative project. You've already built a network of engaged, enthusiastic supporters who have gained through supporting your work. They'll be eager to get involved next time as well.

Cons of Rewards-Based Approaches

  • The pressure is on. Once you've successfully raised money, you've got to ship whatever you're producing. The clock is ticking and it's no surprise that many of the top crowdfunding projects are very late in delivering rewards to donors.
  • Lot of work, potentially little payoff. Because of the binary nature of some crowdfunding campaigns (if you don't hit your target, you get nothing), you can wind up spending a lot of time and energy running a campaign that ultimately fails.

Equity Crowdfunding

Rewards-based crowdfunders make donations in exchange for rewards and the satisfaction of helping you achieve your goals. Equity crowdfunders are actually providing you with working capital in exchange for a piece of your company.

Pros of Equity Crowdfunding

  • It's smart money. By taking angel investing (individuals investing in startups) online, equity crowdfunding has opened up this type of investing to more and more people. There are very accomplished investors using these platform whose contribution may add to the success of your business long term.
  • There are potentially larger sums of fundraising. OurCrowd is one of the most active equity crowdfunding platforms in the world, raising over $30 million in 2013. They routinely raise $500,000 to over $1.5 million for companies on the platform. Same goes for sites like AngelList, CircleUp, and FundersClub. That type of money is harder to come by in the form of $25 donations.
  • Easier investor relations. Managing numerous investors in your company becomes a very time-consuming job. Instead of raising money from numerous investors, some equity crowdfunding platforms pool the funds they raise into a single investment, making one point of contact for reporting requirements.

Cons of Equity Crowdfunding

  • Increased transparency. Not all entrepreneurs are comfortable posting their financials and business plans online for investors to see. Getting comfortable with equity crowdfunding means you must get comfortable with increased transparency into your business.
  • "Expensive" fundraising. Why give away a piece of your company if you could receive donations to build your next killer product? It's a strong question and one that entrepreneurs must see an answer to. Giving away a piece of your business' pie is only worth it if you're getting something valuable in return (like the participation of experienced investors in your industry, for example).

The Bottom Line

Crowdfunding has emerged to be a valuable, viable way for businesses to raise money. We didn't even discuss the possibility of using crowdfunding to raise money via debt, small loans issued by individuals requiring payback. Crowdfunding platforms are finding more and more creative ways to fund new projects and businesses.