Advantages and Disadvantages of Crowdfunding: 6 Things to Know

Only about 10% of startups become successful. One of the reasons is insufficient funding. That’s why crowdfunding is gaining popularity.

In the past years, crowdfunding has become one of the most efficient ways for businesses to acquire capital. The ability to collect money from several investments instead of focusing on single options gave many startups an opportunity to thrive.

The key appeal of crowdfunding is its simplicity. All you need to do is sign up to one of the investment platforms like Stokr, list your needs, share a business plan, and start raising money. However, crowdfunding is much more than simply asking. You need a smart implementation strategy, which requires careful execution.

Before you take advantage of crowdfunding, consider the advantages and disadvantages of this endeavor.

Advantages of Crowdfunding

Here are the most important benefits of using crowdfunding for your startup.

1. Lack of Financial Risk

Crowdfunding allows you to see whether your business idea has potential without taking on too many financial risks. All you have to do is create a business plan and be ready to test the waters.

The information you gain in the process can help you understand whether further investments in equipment, team, materials, and development are necessary. Even though you still need to pay several fees, it’s much less risky than investing your own money into something that may or may not work out.

Meanwhile, if the campaign succeeds, you get to keep all your equity and control.

2. Free Marketing

Investors are interested in your success. While tracking your progress, they could be promoting your business without any investment on your part.

Since marketing is one of the most important aspects of a startup’s success, getting such assistance is priceless. When you have many investors, your chances of being promoted are much bigger than with one or two involved parties.

Depending on the size of the investor’s network, you can save a substantial amount of money on promotion.

3. Money

The key benefit of crowdfunding is, of course, money. It’s possible to raise sufficient funds to start a business and run it worry-free for a long period of time. Meanwhile, sharing your idea can attract expert opinions and guidance to help you achieve success faster than the competition.  

The average amount of money a successful crowdfunding campaign can raise is about $7,000. That’s a formidable amount for both solopreneurs and entrepreneurs.

Disadvantages of Crowdfunding

While crowdfunding seems like an excellent opportunity to raise money for your startup, it comes with a few downsides. Make sure to consider them carefully.

1. Success Isn’t Guaranteed

The most obvious downside of crowdfunding projects is failure. If you don’t succeed with your campaign (only 35% of campaign starters do), you may have to deal with the embarrassment and a bad reputation.

Meanwhile, you’d lose all the money, time, and effort you initially invested in the project. However, failure shouldn’t keep you from trying again. You can learn your lessons, draw conclusions, and start a new campaign at any time.

2. Your Idea May Be Stolen

You are putting your idea out there for everyone to see. So unless you’ve gone through patent, copyright, and trademark routine, it may be stolen. Some project starters don’t mind mimicking good ideas and getting investors to notice them first.

Even if you manage to patent your idea, thieves may still try to copy it. You’d have to decide whether you are ready for a long and time-consuming legal battle.

3. It Takes Time

While the crowdfunding process seems simple, it still requires formidable preparations on your part. You need to come up with a marketing plan, a business plan, and a strategy to be successful.

If you don’t invest sufficient time, effort, and money in your idea, you can’t expect to attract investors, who are usually extremely careful about such opportunities.

While crowdfunding is highly attractive, and sometimes the only, way to raise capital for a startup, it comes with a few downsides. By learning what to expect, you can make the right decision about whether to try this money-raising method for your business.