Career Testing
Career Testing
Career Testing
ENTREPRENEURSHIP / MAR. 05, 2014
version 2, draft 2

Crowdfunding 1-O-1: Weighing the Pros and Cons of Crowdfunding Your Start-Up

http://flic.kr/p/cEHZc1

Crowdfunding is at a nascent stage in the entrepreneurial ecosphere and is riding high on the success of social media. Unlike other financing methods, easy accessibility to funds is proving to be a great leverage, yet entrepreneurs need to carefully weigh the pros and cons of crowdfunding before jumping on the bandwagon.

Pros

Easy Accessibility to Funds - Apart from the challenges associated with opting for conventional funding, most of the times cost incurred on availing of finance is lower than those from traditional methods. This is especially true if the rewards model of raising funds is followed. Also, the only other major cost involved is the commission to be paid to the crowdfunding platform that is hosting your idea.

Proof of Concept - In order to present your idea convincingly to prospective funders, you need to have a fool-proof business plan ready along with a prototype. This step is crucial in moulding the idea into a more specific concept. It will help you in obtaining greater clarity on what exactly you want to deliver. At a later stage, if your business takes off and if you choose to approach venture capitalists or angel investors, having a successful crowdfunding campaign will lend credibility to your project.

Hedging of Risk - Risk concentration is high when a conventional financing model is opted. Crowdfunding is a great way to spread risk and minimize any potential losses that may be incurred.

Vetting of Idea/Business Plan - Presenting your idea on such a public platform gives you an opportunity to brainstorm and improve the business plan. Some previously unthought-of perspectives may crop up during the process and incorporating these may prove to be helpful.

Publicity- Crowdfunding acts as a great way to garner some free word-of-mouth publicity and you never know if your idea is mind-boggling it may even end up trending on social media.

Gain Crucial Feedback - Funders usually get an opportunity to use the product before its actual market launch. This is also a great way to get feedback and improvise the product before it hits the market.

Build loyal customer base through personal connection - Funders tend to have a personal involvement with the project and this helps in creating a long-term association with them if the final product is at par with the expectations initially set.  

Cons

Setting a suitable target is a challenge - All or nothing approach is followed by most platforms. It means that if your idea doesn’t hit the right notes with prospective funders and the funding target is not met in the scheduled time, you will not receive any money at all.

Idea isn’t copy-proof - Idea gets exposed in the open market and someone may decide to clone and implement your idea before you are able to do so.

Reputation is at stake - If your idea isn’t good enough or your plan is half-baked, it is still available to viewers on the crowdfunding platform. So, careful thought and approach needs to be put before you go online with your project.

Speed is the key - Once you have struck gold with a great idea, the key to success is to get market ready in a short span. This means that you need to raise funds quickly which rarely happens in crowdfunding. The other challenge is that investors are not willing to wait for a long duration after funding to see the results. Hence, implementation of idea after funding needs to be speedy.

Credibility of crowdfunding is at stake - The number of ideas vying for attention is huge and so is the number of projects getting funded. But if success ratio is not good enough then this upcoming financing method may end up earning a bad name and this will result in negative growth of crowdfunding opportunities in the future.

Future financing may be tough - This situation is likely if shares are issued initially against the contribution made. Usually VCs/angel investors find it unattractive to invest in a business which already has a large number of investors lacking sufficient understanding of the business.

So now that you are armed with this knowledge of pros and cons of crowdfunding, do factor these into your business plan before taking the plunge. 

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