The Pros and Cons of Crowdfunding

Geri Stengel, WE NYC Mentor
Geri Stengel - Ventureneer

Running a successful crowdfunding campaign takes persistence. You have to be a big-picture thinker and a hands-on manager.

Geri Stengel

You may have heard great things about raising money through a rewards-based campaign on a website such as Indiegogo, Kickstarter or Plum Alley. But how do you know if it’s right for your company? To help you make that decision, I’ve compiled a list of the pros and cons. 

The Pros

Crowdfunding is no longer just for people who have trouble raising money through traditional means. Its benefits are so compelling that even Fortune 500 companies such as GE are turning to the crowd when introducing new products. It’s also the one financing option that women are more likely to succeed at than men, according to Hebrew University and Berkeley-Haas School of Business and the Kellogg School of Management.

Debt- and equity-free money
If you take out a loan, you have to pay interest on it. If you accept money from angels or venture capitalists you give up a piece of your company in exchange for funding. However, with rewards-based crowdfunding, you provide backers with a tangible item in exchange for their money. Businesses using rewards-based crowdfunding frequently receive money for a product before manufacturing it.

Insight into the market 
Doing a crowdfunding campaign provides feedback from early adopter customers about product features, communication messages and pricing.  

Validation 
A successful crowdfunding campaign proves not only to you that the market wants your product but also to future funders. 

Customer engagement 
Early customers are more likely to provide feedback and forgive small imperfections. They are also more likely to tell others about your product.

A marketing boost
A crowdfunding campaign can also function as a marketing campaign. It increases the visibility of your product as your campaign is featured and potentially shared on the crowdfunding site.

Geri Stengel

 

The Cons

Just because you’ve decided to do a crowdfunding campaign doesn’t mean you’ll succeed. The success rate on Kickstarter for food-related projects is 26%, fashion 24%, crafts 24% and technology 20%. Indiegogo doesn’t publish its stats. 

The disadvantages that get in the way of success include: 

It takes time and effort
Running a successful crowdfunding campaign takes persistence. You have to be a big-picture thinker and a hands-on manager. You have to be flexible: figure out what outreach methods are most likely to work with your crowd and test and adjust during the campaign. You also will need to do a huge amount of personal outreach. Nor does the work end when your campaign does. Remember that even if everything goes well ‒ especially if everything goes well ‒ you still have to fulfill the rewards and provide the promised product or service. 

It takes money
As crowdfunding becomes more popular, it takes more to be successful. For campaigns with large goals, many are turning to professionals for help with marketing and to manage producing and fulfilling the product, which adds cost to the project. 

There are often unanticipated costs
Make sure you create a budget and account for the cost to manufacture and fulfill your rewards. Include everything from packaging, shipping and marketing expenses to the fees charged by crowdfunding platforms and payment companies. Finally, if you’ve chosen a flexible funding model that allows you to accept less than your entire goal amount, determine if you can cover all of your costs even if you don’t raise your entire goal. 

Weigh the pros and cons carefully before you dive into crowdfunding. How much emphasis you place on each factor depends on the resources you have at hand, your skills and your risk tolerance. For more insights, read Crowdfunding Is A Female Founder's Best Friend, Why Crowdfunding Is So Successful for Women Entrepreneurs, and 8 Tips For Crowdfunding Success.

Article tags:
Finance