Just a few years ago, if you wanted financial backing for a startup, your options were really limited. You could find an investor, or you could take out a business loan. Within the past decade, though, crowdfunding sites like Kickstarter and GoFundMe have changed the game. Instead of going to a small number of investors, each of whom would put in a fairly large sum for your business, you can appeal to thousands (or even millions) of people to put in small sums that add up to the funding you need for your business.
Upon first glance, the idea of crowdfunding is definitely attractive. After all, how hard is it for people to donate between $5 and $50 in exchange for preorders, equity, or other perks from your business when you reach or exceed your funding goal? Well, the amount that people donate isn’t the problem. The problem is how to get the word out and convince people to back you, even with just a little bit of money.
Some entrepreneurs consider this challenge negligible, while others see crowdfunding as too much work for too few rewards. Before you jump right in or walk away without giving crowdfunding another glance, you might want to consider a few factors.
CROWDFUNDING WON’T WORK FOR ALL BUSINESSES
When you look at all of the successful campaigns on crowdfunding sites, you might think that this model can work for any type of business, but that’s not really the case. Authors and filmmakers often run successful crowdfunding campaigns because they’ll offer sneak previews of their work, the opportunity to name a character, and other perks and benefits to backers at different funding levels.
On the other hand, if you’re developing a new app, are you going to give it away for free to all of your crowdfunding backers? Basically, whether it’s tangible (e.g., a preordered product) or not (e.g., naming rights), a successful crowdfunding campaign will offer something in return for donations. If you can’t figure out something valuable to give to your backers that won’t leave you broke before you get started, then crowdfunding isn’t for you.
CROWDFUNDING CAMPAIGNS DON’T RUN THEMSELVES
As much as Kickstarter and GoFundMe would like you to believe otherwise, the vast majority of campaigns aren’t successful. On some sites, you can keep whatever you earned even if you didn’t meet your goal, but on others you’ll get nothing. Even if you do get a percentage of the funds you set out to achieve, will they be enough to do anything meaningful to start and grow your business?
A successful crowdfunding campaign starts with a lot of marketing before the campaign ever starts. Then there’s more marketing throughout the campaign, and at the end you’ll have to follow up with your backers to ensure they get what they’re promised. A successful campaign can be great for your business, but it’s a lot of work.
VENTURE CAPITALISTS OFFER MORE THAN JUST MONEY
Even if your business model is perfectly suited to crowdfunding and you have the time and energy to run a successful campaign, you may still want to think twice. If all you need is funding, then crowdfunding is a great way to go. However, if you want business guidance, advice, and other services to help ensure that you succeed, you might want to go talk to a venture capitalist. These investors have a vested interest in seeing you succeed, so they’re likely to help you more than a bunch of people who are willing to put in a few dollars because they think your idea is cool.
I don’t want to tell you that you absolutely shouldn’t consider crowdfunding for your startup, but you should keep these things in mind. Crowdfunding has its pros and cons, just like approaching angel investors and venture capitalists. Learn everything you need to know about your options for finding capital before you commit to one that might not work for you.