What are the pros and cons of crowdfunding?

Author: Justin Reynolds | July 25, 2018

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.

Several noteworthy and successful projects—like Oculus, Exploding Kittens, and Allbirds—started out on crowdfunding platforms. On the flip side, untold numbers of campaigns never reach their fundraising goals.

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 of 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.

What’s more, folks who pledge less than $10 have to pay a 5% plus $0.05 fee per pledge.

5. It doesn’t work for all businesses

If you’re researching funding for startups, you should know that 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.

Frequently asked questions

Since you’re reading these words, chances are you’re wondering whether crowdfunding makes sense for your business. 

In some cases, it might. 

To make your decision easier, we’ve compiled a list of some of the more common questions entrepreneurs ask when figuring out how to pay the bills. 

1. How do I get funding for my startup?

First things first: Before you look to fund your startup, you first need to determine the type of business entity you’ll be: a sole proprietorship, a limited liability company (LLC), or a corporation. 

Each has their pros and cons, so make sure you do your due diligence so you pick the right one.

When it comes to funding for startups, many options are available. You could seek out venture capital and angel investors, you could try to raise a seed funding round among friends and family, and you can also try to secure business loans and small business grants.

On top of that, you could always opt to take out a business line of credit or, in the vein of this post, launch a crowdfunding campaign. 

2. Can startups apply for funding?

Absolutely. Startups can apply for funding, and many of them do.

If you’re thinking about applying for funding for your startup, you might want to check out term loans. 

Pro tip: Unless you’re keen on jumping through a number of hoops to see whether you qualify, only to then learn about things like origination fees, application fees, and prepayment penalties, you might be best off looking into alternative lenders that are upfront about fees—like Fundbox.

That way, you can avoid sticker shock when the ink finally dries.

3. How do I get free money to start a business?

Even if you find some of the lost treasures of the world or secure small business grants, there’s no such thing as “free money.” 

At the very least, you’re putting your own time, energy, and resources into making it all happen.

That said, if you’re willing to give up equity in your company, you might be able to secure a convertible note in exchange for ownership. 

Here’s how it works: You receive funding from an investor in exchange for a convertible note which then—like the name suggests—“converts” into shares of preferred stock in the wake of a qualifying event, e.g., a successful Series A round. 

4. What do startups use funding for?

At the end of the day, startups use funding to grow their businesses.

Depending on the stage of the company, this might mean hiring on additional workers, opening up new offices, launching aggressive new campaigns, or even acquiring other companies.

When you crowdfund your business, you generally have to offer products or services in exchange for financing. When you secure funding other ways, you usually have more control over where your cash can go.

5. How long does it take to get funding for a startup?

While your mileage may vary, it can take anywhere between three months and 9 months for a well-qualified startup to secure venture capital financing.

 Of course, it can take even longer than that, and who knows whether a VC will ever cut you a check at all. (Depending who you ask, it could even take “10 seconds.” But, let’s face it, ideas like that are few and far between.)

A traditional bank might finance your loan in as fast as 90 days. But with small business financing rates on the decline, few small business owners have the luxury of twiddling their thumbs for three months, hoping for the best.

Fast funding for startups: Can you afford to wait to grow your business?

Are you interested in crowdfunding your business or do you want more control over your destiny?

As an entrepreneur, you’re the only one who knows your goals—and your timetable. 

If you’re willing to sell equity in your company in exchange for funding—and endure a monthslong process where you hopefully secure VC dollars—then it could make sense to try to track down an angel investor or try to raise a seed round.

On the other hand, if you’re looking to build your business today, time is of the essence. 

Instead of waiting weeks or months for funding that may never materialize, you could be better off taking a proactive approach to small business financing and applying for term loans or a business line of credit.

If approved, you’ll have quick access to the money you need to finance your small business—all without having to sell any sliver of the business you’ve worked so hard to build.

Looking for quick, fast funding for startups?

When it boils down to it, few entrepreneurs have the resources needed to be picky when it comes to financing their startups.

If you’d rather not wait as long as nine months for financing that may never come through in the first place, we may be able to help.

For more information on the easiest way to quickly secure funding for your startup without having to give up control of your business or deliver on crowdfunding promises, check this out.

Ready for more?

Apply for funding and find out if you qualify today