Crowdfunding: advantages and disadvantages

Crowdfunding is an increasingly common term, which, in the most basic form, describes the situation where a group of individuals give money to fund an idea such as a business, project, or scheme.

Crowdfunding is very cool. Even its more recent beginnings are rooted in a rock band raising money from their fans to fund a tour (British rock band Marillion, which sought help from fans to fund their 1997 US tour – raising $60,000).

The phenomena looks set to stay, as more companies search for alternative funding, and individuals pivot to new career paths that often require funding.

Marillion, the band, might have kicked-off the modern renaissance of crowdfunding but the concept has been around since the dawn of modern civilisation, including examples such as Alexander Pope, who requested donations to fund his work translating Greek poetry into English in 1713.

Composer Mozart suffered a failed crowdfunding attempt in 1783, but successfully raised enough money a year later from supporters to perform three new piano concertos. Both offered rewards for backing their projects.

Times have moved on and the digital era has given rise to a plethora of crowdfunding platforms online; there’s a platform out there for all sorts of specific fundraising niches. Figures suggest more than US$34 billion worldwide has been raised using crowdfunding platforms.

Today, capital is becoming harder and harder to come by, especially in the current climate. But 2021 market analysis by Technavio reveals that the global crowdfunding market can potentially grow by $196.36 billion from 2021 to 2025 – and some 62% of that growth will come from the APAC region. The research company anticipates 13.86% market growth in 2021.

Indiegogo, widely considered one of the world’s busiest and best crowdfunding sites, is home to nine million backers from 235 countries.

The platform also has around 10 million monthly visitors (Indiegogo, 2021). The latest on reward-based crowdfunding statistics indicates that every corner of the globe garners revenues from the campaigns, with North America being the largest beneficiary.

It seems easier than ever for professionals with a bankable concept to use crowdfunding to take their business ideas off the ground. And platforms like Kickstarter, GoFundMe, and Indiegogo show no signs of slowing down.

Of course, given the dire straits the pandemic has created for many SMEs, it could be that crowdfunding provides a vital business lifeline beyond government and bank loans, handouts and support schemes – many of which are now drying up.

Crowdfunding advantages

Creating debt to keep your business afloat is never a good idea, and crowdfunding offers a specific set of perks, including:

Market and network growth: Whether you plan to launch a new product or are simply trying to stay afloat, crowdfunding can help reach new markets and build up a bigger network of like-minded people and businesses.

Business acceleration: Loans are limited, and subject to ever-stricter risk analysis, controls and regulation. Crowdfund, and you’re in control of the amount. A successful campaign can even exceed your goal. Such a campaign can only benefit rapid business growth.

You’re in control: As a crowdfunding recipient, you are not giving up equity or paying loan interest and charges. People give to campaigns out of shared interest, altruism and appreciation of your business’ products and services.

And while you can – and should – incentivise those donating, that’s still a good deal compared to getting a loan. (Note: If you’re doing equity crowdfunding, this does not apply as this form of crowdfunding trades equity for typically more substantial investment.)

Central Control: Your campaign will normally be hosted via one platform, and one page on that platform – which leads to easy outreach, lead generation, and fundraising in one single location.

Crowdfunding disadvantages

And while crowdfunding might be the fundraising method of choice right now, it does come with disadvantages we must all be made aware of.

Its popularity can also mean your downfall. Many sites operate on a ‘reach the full amount required or fail’ basis, so it’s crucial to get word out that you are looking for funds, and the platforms are highly competitive, with different companies, brands and projects all fighting for internet real estate.

Other pitfalls to bear in mind include:

It’s tough out there: Crowdfunding might seem like a panacea, but it’s hard. You need to have a highly developed, well-honed digital marketing strategy in place to take full advantage of crowdfunding.

Staying relevant on an ever-changing site is tough, as is asking people to back your product or service when they might not have heard of it, especially in these trying economic times.

Is your bait good enough? A solid crowdfunding campaign needs to be engaging, thorough and well communicated. You’re looking for money from a lot of strangers, so you must optimise your page to turn visitors into backers….and keep momentum going throughout the campaign with a great many updates.

Say hi to hackers: You might think you’ve reached your funding goal, only to discover you’ve fallen victim to online fraud. And some campaigns are actually fraudulent, too, with some project creators having little or no intention of pursuing the project they’re crowdfunding for.

Reputation and credit building: In terms of future investment, a crowdfunding campaign might not impress future investors, and such campaigns do next to nothing to build a company’s credit worthiness.