Crowdfunding is a great alternative to traditional early stage funding strategies. It comes with its fair share of advantages and disadvantages. As an entrepreneur, it is important to look at both sides when deciding whether or not crowdfunding is right for your venture and should consider the following reasons.
1. All or Nothing: Most crowdfunding platforms use the “all or nothing” model, which means even if you are a dollar short of your target you will end up with nothing. Entrepreneurs need to make sure they have the correct goal amount.
2. Negative Impact on Reputation and Future Financing Options: Once your campaign is over, it continues to stay on the crowdfunding platform used. Everyone can see if your campaign failed, and it can put your reputation on the line for future projects. This is especially true if you are planning to pitch to any when pitching to any sophisticated investors. They will definitely be aware if you failed and may use that as a reason enough to not invest in your business.
3. Speed: You need to make sure your business does not have a lengthy R&D cycle and your product needs to be ready within months of the end of your campaign. Backers want to be part of the success and do not want to have to wait years to receive their pledged reward. There also may be times when your business requires a rapid infusion of cash and cannot wait the allotted time for the crowdfunding campaign to finish.
4. Reward Time and Money: Every so often, entrepreneurs will add in extra rewards as it gets closer to the end of the allotted time of the campaign. Some rewards can cost extra money and time. Sometimes entrepreneurs forget to factor in these additional costs into the original goal, so even if you do reach your target, it is possible you may not have enough left over time or money, after giving out rewards, for your original campaign. Rewards need to be considered very carefully.
5. Quality of Feedback: A huge advantage to pitching to sophisticated investors is the amount and quality of feedback you receive. They can give you advice not only on your business or product, but on the actual business model. Since crowdfunding typically involves peers and members of the community, if you even get feedback on your campaign it might lack the expertise you need to improve your business model.
6. Not For Large Investments: It can be very challenging to raise the amount of money needed for larger ventures requiring millions of dollars. If you have a successful campaign, it means you were able to raise a small amount of money from a large amount of investors. Depending on your project, crowdfunding is not always the most adequate funding strategy.
7. Less Appeal For Business To Business Products: Crowdfunding in itself lets you know that you are leveraging your products to the crowd, or the consumer. The crowd represents your peers and people of the community who are looking for the next best thing to help solve their day to day problems. Unless your idea is something that is meaningful or cool to the public, it is not likely the sufficient amount of funds will be raised for your venture.