Crowd funding is no longer a new concept. It has become quite popular on the internet giving rise to numerous crowd funding sites. In a world overflowing with brilliant business ideas, the only limiting factor is funding.
What is Crowd Funding?
Crowd funding simply means “getting funds from a crowd”. With President Barack Obama signing the Jump-Start Our Business Startups (JOBS) Acts into law in April 2012, crowd funding has become legal, giving rise to so many websites providing platforms for investors and entrepreneurs to access funds for various reasons. The businesses that are best placed to benefit from this Act are the start ups or SMEs that require less than a hundred thousand dollars. It has provided local businesses with the opportunity to raise funds for their business with little risk. Other countries have similar ideas, and there is definitely no limit to what entrepreneurs can achieve with the availability of capital. You may like to read Crowd Funding 101, explains Everything A Startup Business Need To Know.
What are the Benefits of Crowd Funding?
Although the main purpose of crowd funding is to get funds for the business, there are other benefits that can be derived from crowd funding campaigns. Some are; traction, social proof, marketing, press coverage, and potential investor interest.
Traction: Crowd funding can help generate traction for startups. This is especially important in determining the probability of success of the product and reassure investors that they are backing the right tree.
Social proof: When new clients and investors show interest in your product, it helps in confirming that the service or product is relevant to the society. It is the social proof that many entrepreneurs need to jumpstart their businesses.
Press Coverage: Crowd sourcing campaigns can give your product publicity and give room for backers from other networks to invest into your product. This gives room for press coverage that will extend from news stations, print publications and blogs, depending on the individuals who have shown interest in the campaign.
Marketing: Crowd sourcing campaigns also serves as an avenue to market your products and services. Though the aim is to get funds, entrepreneur’s products and services can still be marketed to the populace. How else can you convince an investor to trust your business idea if you cannot market it to get the much needed funds?
Potential investors: This is the main benefit of crowd funding. Depending on the nature of buzz a crowd funding campaign generates, especially the social proof and traction, and media publicity, you will definitely appeal to potential investors who will buy your idea.
What are the Disadvantages of Crowd Funding?
Crowd funding is indeed exciting and has numerous advantages. However, there are disadvantages that should also be put into consideration by the entrepreneur before seeking this option as an alternative to finding capital to set up a business. Although crowd funding might have realized amazing results for many entrepreneurs, there are no guarantees. It is therefore advisable to consider some of the disadvantages before embracing it fully.
1. Sufficient Funds: Successful campaigns can lead to collection of sufficient funds to get the business started. Unfortunately, this is not always the case. Most successful campaigns do not result to funds that are adequate to take the business off the ground. The entrepreneur might still have to consider other sources of funds.
2. Exposure risk: Although it seems harmless, you will have to provide the public with some project details. As much as this will get investors to consider supporting your project, it will also provide your competitors with information about your business that might give them an edge over you. Someone else can pick up your business idea and turn it into a competing venture that might affect your own.
3. It is Short-term: It is not viable to use crowd funding for a long term project. It can easily be successful in a short term project but for long term, the chances are slim.
4. Short Description: There is no opportunity to have a personal discussion with the investors. The short description that you are to provide is all that the investors will have to consider your project. Many a time, this description is insufficient to convince a potential investor.
What is the Future of Crowd Funding?
If you are unable to get access to a bank loan, there are other means of getting funding for your business idea. It is always best that you consider all your options before making a decision. Crowd funding campaign might be appealing, but you have to ensure that it is the best option for you. Other alternative means of funding your business include Family and friends, Seller financing and retirement funds. You can also consider these options to fund your business. As things stand, crowd funding will be around for a pretty long time, beyond 2013, and entrepreneurs can reap the best from it. Also you may like to checkout my other articles on Fundraising for Small Business, this lists a series of articles explaining several ways to get funds for your startup business.