Having an idea is terrific. Having a plan is better. Getting funding to put that idea into motion can be a challenge.
Fortunately, crowdfunding has evolved as a flexible new source of funding for startups. There is no need to impress just one billionaire or an investment firm. Crowdfunding investors pool their resources and provide seed money to a promising and potentially profitable idea.
Crowdfunding is an increasingly popular way to get funding, from loans to individuals to tech startups. According to smallbizgenius, the global market size of crowdfunding was $84 billion in 2018 and is expected to reach $114 billion by 2021. As with any method of funding, there are advantages and drawbacks.
The Pros of Crowdfunding
A Diversity of the Market
There may be some areas of crowdfunding that are crowded. Your aunt who wants a crowdfunded grant to finish her novel, independent musicians looking for producers and individuals who need to get through the month are all over crowdfunding platforms such as Kickstarter and Indiegogo.
However, if you have a truly original idea, particularly in the area of tech, real estate, healthcare, and alternative energy, your chances of attracting investors is greater because there is less competition. Investors may be looking for you, rather than vice versa, if your startup is related to these areas.
Investors Breed Investors
Once an idea catches fire and gets attention, other investors are likely to jump on board, particularly if other investors whose opinions they trust have endorsed the idea. A competition may ensue on who will get the bigger share. This may seem like a dream scenario, but it is likely to happen on a crowdfunding platform because there is visibility into how much attention a product is receiving from investors.
Once you have created a pool of available investors, they may be there to stay. Certainly, they will want to see your project through to its successful completion. Once investors have received a healthy return on their investments, they are likely to provide funding again for similar projects.
Using the Platform’s Resources
Leveraging the resources of the crowdfunding platform can be easier than building a campaign yourself. Although there is a crowd of those seeking funding on these platforms, it is for this reason investors are attracted to these sites. Many business owners and those with original ideas may find it easier to use a platform for a campaign than to build it from scratch.
Cons of Crowdfunding
Competition Puts the “Crowd” in Crowdfunding
Although the popularity of these sites may mean more investors are looking for opportunities, it is just as likely that a brand or company can get lost in the shuffle. It may take some effort and time to get noticed, but by that time, the campaign may be over. Keep in mind that only 22.9% of crowdfunding campaigns are successful, so it may take more than one attempt to get it right.
Cost and Time
The crowdfunding platforms can make it easier to launch a campaign, but to garner attention, a significant investment of time and effort is needed to distinguish your product or idea from the many others that occupy the platform. Although these steps may pay off once the right investors find your campaign, there may be a need to spend money to launch the funding campaign.
Lack of Legal Oversight
Although it would be an exaggeration to call crowdfunding the Wild, Wild West, there is a lack of regulation that may cause some to be wary. There are a multiplicity of issues that can come up regarding the funding itself, intellectual property protection, and taxation. Take care and have a good lawyer if you are using a crowdfunding platform for seed money.
Finding Funding For Your Idea
Crowdfunding is increasingly the way startups secure funding. There may be a lot of competition, but the pool of potential investors is larger on these platforms than anywhere else. Investing time and resources on a campaign that will grab interest and secure seed money is likely to pay off in a successful funding bid for your startup.
