Why Crowdfunding May Not Be the Right Choice for Your Startup

Crowdfunding has given small businesses the opportunity to raise capital and turn their entrepreneurial dreams into a reality. For young millennial entrepreneurs, this form of capital is accessible as opposed to solely seeking investment from angel investors or venture capitalists. While crowdfunding can help entrepreneurs to get the word out about your product, it may not always be the right choice for financing your startup. Before deciding to move forward with a crowdfunding campaign consider these factors:

Crowdfunding forgoes the expertise another partner may provide
Investors usually fund businesses in industries that they have experience and knowledge in. Investors provide an extension of their network. Working with the right investor can lead to a new manufacturer relation that produces your product for a lower cost and an investor’s connections/visibility can also provide press and credibility. The connections and acumen that comes with an investor may be worth the exchange of company equity. This relation may be the contributing factor of the success for your business. With crowdfunding, you team up with many smaller-scale “investors” who may not bring that additional area of expertise and real-world experience that your venture may need to move forward.

Crowdfunding can set unrealistic expectations of your business
Crowdfunding is a new form of funding for businesses. Previously, the typical chain of investment was angel investors for the early stages and then venture capitalists or conglomerates investments once the business had become more established. Crowdfunding success can be attractive to some investors but not to others. Since crowdfunding is powered by the public with small increments of cash, the risk factor of investing is eliminated. Second round investors may deem the business too risky for investment as crowdfunding is not a viable measure of the company’s likelihood to succeed.

Crowdfunding requires intensive marketing
Crowdfunding is a 30-day campaign. Though different platforms have different requirements, you must raise some, if not all, of your fundraising goal figure within the designated timeframe in order to receive part or all of the funding raised. Marketing is essential during this time and requires a sizable budget and dedication of your time. Brands that have strong social media presence before the launch of the campaign tend to have more success on crowdfunding platforms. There are multiple products on Kickstarter or Indiegogo at any given time, and some may be very similar to your product. It is crucial to strategically market your brand and product during the crowdfunding campaign.

Crowdfunding has broken down barriers for investment and given businesses a new option for capital. However, make sure to do your research to know if crowdfunding is the right choice for your helping to finance your business.

Karen Kim