Crowdfunding has become increasingly popular ever since platforms like Kickstarter and Indiegogo emerged on the scene a decade ago. It’s no wonder why crowdfunding platforms are exciting to many. All of a sudden, aspiring entrepreneurs who needed cash to turn their ideas into reality could pitch their businesses directly to the public—sidestepping the traditional gatekeepers of small business financing, like banks and venture capitalists. Established small businesses looking to fund new product development could do the same.
Is crowdfunding right for your small business? Consider these pros and cons to determine whether it makes sense for your specific situation.
PROS: Reasons to Consider Crowdfunding
1. There’s not much financial risk
Crowdfunding enables you to test the waters to see whether your idea has merit without taking on a ton of financial risk. You can test the market and get some reactions before spending money on expensive inventory, materials, or development. That beats funding an unproven business idea out of your own pocket.
2. Your campaign could go viral
You never know if your campaign will spread quickly across social media, exposing your product to a number folks you’d be unable to otherwise reach.
3. A successful campaign validates your business idea
Reaching or exceeding your fundraising goal proves that there’s demand for your product or service. Doubt is removed from the equation.
4. You keep all of your equity
If your campaign succeeds, you’ll have to deliver rewards to your backers—but you won’t have to give up any equity or lose any control of your company.
5. You can tap into an existing community—and build your own
Crowdfunding allows you to leverage an engaged community that’s already looking to support ideas like yours. Create a successful campaign and you’ll build a large community of your own. Together, they’ll provide critical feedback you can use to make your idea stronger.
CONS: Reasons to be Cautious With Crowdfunding
1. It takes time and money
Successful crowdfunding campaigns require a lot of effort. You’ll likely also have to invest several thousand dollars—if not tens of thousands of dollars—to build prototypes, create appealing videos, write persuasive content, and market it all effectively.
2. Your campaign might not succeed
Less than one-third of all crowdfunding campaigns meet their goals. If yours doesn’t succeed, you may have to deal with some bad press or embarrassment—and you won’t get the time or money you invested back.
3. Someone could steal your idea
Unless your idea is protected—with patents, copyrights, or trademarks—there’s a chance someone could stumble across your campaign and decide to try to mimic what you’re building. Keep your fingers crossed that they can’t build your idea better or faster than you can. Even if you hold a patent or trademark, if your idea is attractive, someone might try to copy you, anyway, and you could be faced with the challenging decision of whether, or how, to fight a legal battle.
4. You have to pay several fees
Kickstarter, for example, takes 5% of every successful campaign. Those who meet their goals on the platform will also have to pay credit card companies 3% plus $0.20 on each transaction over $10. If, for example, you raise $100,000 on Kickstarter from 100 people who all put in $1,000, you’d end up with a little less than $92,000 to get to work with. That may not be the worst thing in the world, but it’s something to consider.
5. It doesn’t work for all businesses
You may be able to crowdfund enough money to build a consumer-facing product—like a card game, a jacket, or a smartwatch. If you’re thinking about starting a catering or painting business, you’ll likely have to look elsewhere for capital.
Crowdfunding may be the best path forward for some businesses. Unfortunately, a significant majority of small businesses that go this route never meet their fundraising goals.
If crowdfunding isn’t right for your company, you’re not out of hope. There are other small business financing mechanisms to choose from. Learn about them in our guide: Small Business Funding, Demystified.