The Pros and Cons of Crowdfunding Your Small Business
May 21, 2019
May 21, 2019
Crowdfunding yourÂ small businessÂ is one surefire way to find out whether your customer base believes in yourÂ business idea. Itâ€™s very accessible financing â€” no need to be eligible for aÂ bank loanÂ or other traditional types of funding. And it works on your timeline; you can run aÂ fundraisingÂ campaign when you have aÂ new businessÂ orÂ new productsÂ or services in the pipeline, or when you need working capital.
One of the most appealing features of crowdfunding is that virtually anyÂ entrepreneurÂ can do it. Even Hollywood executives are usingÂ crowdfunding platformsÂ to finance film projects. For example, in 2013, director and screenwriter Rob Thomas was able to raise over $5 million onÂ KickstarterÂ to finance the Veronica Mars movie.
There are two mainÂ types ofÂ crowdfundingÂ campaigns: Rewards-based and equity-based. Just as there are pros andÂ cons of crowdfundingÂ as a way ofÂ raising funds, there are pros and cons to eachÂ type ofÂ crowdfundingÂ campaign. Make no mistake, both are aÂ lot of work. But so is any way of reaching aÂ funding goal.
As the name suggests, thisÂ type ofÂ crowdfundingÂ campaignÂ involves offering investors, also known asÂ backers,Â incentivesÂ to donate to your project. You can offer different tiers of rewards based on how much money a person donates. Someone who donates $100 might get merchandise like a t-shirt with your logo on it, while someone who donates $1,000 might get exclusive access to try your product first.Â Kickstarter,Â Indiegogo, andÂ GoFundMeÂ are some of the most well-known rewards-basedÂ crowdfunding platforms.
InÂ equity crowdfunding, people invest in your business in exchange for equity in the company. Unlike rewards-based crowdfunding, your contributors donâ€™t receive a physical product or service; instead, they are banking on your companyâ€™s future success in order to get a return on their investment.Â FundableÂ andÂ CrowdfunderÂ are twoÂ crowdfunding websitesÂ that are specifically made forÂ equity crowdfunding.
This type of campaign comes with some serious downsides:
No matter whichÂ type of crowdfundingÂ is right for yourÂ small business, if you want to have a successful campaign, youâ€™ll need to keep several things in mind.
Raising capital for your business doesnâ€™t need to be an agonizing process. The digital age has made it easier than ever to reachÂ potential investors, and crowdfunding can be one of the easiest ways to raiseÂ business funding. AÂ successfulÂ crowdfunding campaignÂ is not a get-rich-quick scheme; it requires serious planning and diligence. Itâ€™s not necessarily the right way toÂ raise moneyÂ for every company. So do your due diligence, review yourÂ business plans, and make sure you have a realistic vision in mind to ensure yourÂ small businessâ€™s success. If you think crowdfunding could be the right move for you and your business, check out ourÂ in-depth article on the future of crowdfundingÂ and the direction it is heading towards.
Emily Lazration is the Content Marketing specialist at CoverWallet, a tech company that makes it easy for businesses to understand, buy and manage commercial insurance online.