From paying attention to fees to balancing what works for you, here are 13 answers to the questions, “Is crowdfunding for startups a good idea? Why or why not?”
- No, High Transaction Fees
- No, Too Many Lenders
- No, Beware the Double-Edged Sword
- Yes, but Look for Restrictions
- Yes, but Not for Everyone
- Yes, but as Part of a Broader Fundraising Strategy
- No, Too Distracting and Saturated
- Yes, for Marketing and PR
- Yes, for Initial Verification
- Yes, to See if Your Product Will Sell
- Yes, to Attract Early Adopters
- Yes, for Raising Capital, Creating Content, Rewards, and Autonomy
- Yes, but Weigh the Pros and Cons
No, High Transaction Fees
Crowdfunding platforms charge fees for their services, which can range from 5% to 10% of the total funds raised, which eats into the amount of capital that the startup receives at the end of the campaign. These fees are charged to cover the costs of operating the crowdfunding platform, including marketing, payment processing, and customer support.
While these fees may seem reasonable at first glance, they can add up quickly and significantly impact the amount of capital that the startup receives from the crowdfunding campaign. Additionally, some crowdfunding platforms may charge additional fees for certain services, including offering marketing and admin support.
Joe Flanagan, Founder, 90s Fashion World
No, Too Many Lenders
While the idea of sourcing capital from multiple smaller sources is an enticing one, the reality is far less pleasant. Too many lenders to keep track of makes it hard to manage the various people who have a stake in your venture and their different expectations.
In addition, there can be uncertainty over how much capital one will actually generate, as getting all these individual stakeholders on board can be a difficult task. All in all, while crowdfunding can provide alternative sources of startup funding, its immense workload and unreliable returns make it an unappealing option to explore.
Lorien Strydom, Executive Country Manager, Financer.com
No, Beware the Double-Edged Sword
Crowdfunding is a double-edged sword because of its public nature. A campaign should only be used if your product has a “viral” quality to it. The crowdfunding act itself becomes a marketing strategy. The interest in it is quantifiable, proof that there is interest in the idea.
On the other hand, failing to raise the desired funds proves its limitations in the marketplace. Many startup ideas can be unnecessarily set back in the eyes of other investors if the crowdfunding attempt goes sideways.
Bridget Reed, Co-founder and VP of Content, The Word Counter
Yes, but Look for Restrictions
Crowdfunding is an efficient and cost-effective way to raise money to finance the development of a startup. With crowdfunding, startups have access to a large pool of potential investors to help fund their projects with relatively low fees and minimal risk. It also allows entrepreneurs to create awareness around their product or service and provides an opportunity to engage a larger audience of potential customers.
On the other hand, crowdfunding can also be risky for startups. There is no guarantee that investors will come through with their promised money, and it can be difficult to project how much money you will actually raise. Additionally, some types of crowdfunding campaigns require up-front expenses, and it can take a long time to see a return on investment.
Some platforms have strict regulations regarding what types of projects and products can be listed on the site, so startups might not always be able to get approval for their campaigns.
Michael Dadashi, CEO, Infinite Recovery
Yes, but Not for Everyone
Crowdfunding is a great way to connect with potential clients before launch. Startups can gain many enthusiastic followers who can invest their money and contribute to the business’s success. Therefore, they will likely be more emotionally invested in the startup’s success.
However, crowdfunding is not for everyone. It’s a great starting point if you’re not established enough to gain capital from large investors, but it can be very time-consuming, as you essentially need to create a complete marketing and investing campaign that requires constant nurturing to see success from it.
Inbar Madar, Founder and Business Consultant, M.I. Business Consulting
Yes, but as Part of a Broader Fundraising Strategy
Crowdfunding is best seen as a component of a more comprehensive fundraising approach for new businesses. While it can be a beneficial tool for raising funds and developing a community of supporters, it should not be a startup’s exclusive source of funding.
Founders should consider other fundraising possibilities, such as traditional venture capital or angel investment, as well as non-dilutive funding sources such as grants or loans. By broadening their fundraising efforts, founders can enhance their odds of success and ensure they have the resources they need to develop a successful business.
Tiffany Hafler, Marketing Coordinator, Blockchain Lawyer
No, Too Distracting and Saturated
Despite the advantages of crowdfunding, I believe there are also potential drawbacks to consider. One drawback is that crowdfunding campaigns can be time-consuming and distracting, diverting attention away from genuine business development.
Furthermore, a failed crowdfunding campaign can be depressing for the founder and make future capital raising more difficult. Another major issue with crowdfunding is that standing out in a crowded marketplace can be tough.
There are many crowdfunding campaigns competing for attention, and getting noticed and attracting backers can be difficult. Furthermore, crowdfunding can be a very public process, making it difficult to keep corporate information private.
Gerrid Smith, Communications Manager, Property Tax Loan Pros
Yes, for Marketing and PR
Crowdfunding efforts have the potential to be a useful resource for business owners who wish to increase interest in and visibility for their product or service by soliciting monetary contributions from a large number of people.
Through crowdfunding campaigns, new businesses can connect with potential customers and backers who are interested in their product or service and can offer valuable feedback and assistance in spreading the word.
Dean Lee, Head of E-commerce, 88Vape
Yes, for Initial Verification
Crowdfunding campaigns may be a great way for new businesses to get early feedback on their products or services. Also, they can learn about the interest of the market and get constructive criticism from backers.
However, they are time-consuming. Planning, launching, and managing successful crowdfunding projects take a lot of time and energy. Making an engaging pitch, creating prizes, and managing the campaign’s logistics can take a lot of work.
Sasha Quail, Business Development Manager, claims.co.uk
Yes, to See if Your Product Will Sell
In the future, you will probably have to deal with traditional investors. Nonetheless, a successful crowdfunding campaign might act as a portfolio to show to potential investors. You’ll need to prove your company’s viability in the marketplace before investors will risk money on it. At the trial-and-error phase of an idea’s development, this is a significant challenge.
Crowdfunding might be used to develop a solid prototype, which will aid in building trust and credibility with them. Isn’t this a little too soon to tell? That’s great, too; consider your crowdfunding campaign a scientific experiment. Before investing time or money, you can gauge the level of interest and willingness to pay for your ideas. If you cannot raise enough money through crowdfunding, it may be time to reevaluate your business concept.
Mathew Bowley, Head of Marketing, Solmar Villas
Yes, to Attract Early Adopters
It’s impossible to overstate the importance of early adopters, who will be the driving force behind your company’s expansion into the mainstream thanks to their dedication and enthusiasm for your company’s vision and values.
It’s not always simple to discover such devoted patrons and promoters. This group represents those who believe in your ability to achieve your goals and will put their money where their mouth is by investing in your business. They’re the first to tell their friends and family about you, to promote you online and in person, and to cheer you on at every turn.
This is a tremendous perk of crowdsourcing that should not be ignored. Your campaign is a golden opportunity to introduce your brand’s values, history, stories, and plans to people who might become passionate champions. It can serve as a centralized hub for distributing all of your most important information. Forgoing one is like throwing away money.
Shakzod Khabibov, Founder, Natura Market
Yes, for Raising Capital, Creating Content, Rewards, and Autonomy
Crowdfunding for startups can be a great way to raise capital without requiring a large loan from a bank or outside investor.
For example, artists on Patreon can solicit members of their fan base to donate in appreciation and support of their work going forward. This allows them to continue creating content and often even generate revenue for living expenses, without begging for money at each individual show or only relying upon royalty payments from music sales when available.
Depending upon the platform, it is also possible to provide rewards such as merchandise bundles, early access to albums, or even one-on-one experiences with the creators of these projects, based upon set tiers of contributions. As long as there is enough interest accrued towards meeting goal targets, startup crowdfunding can offer a much better route than traditional means, while potentially allowing companies more autonomy and control over how they manage their project funding.
Amy Ling Lin, CEO, sundays
Yes, but Weigh the Pros and Cons
Crowdfunding has become a popular alternative to traditional fundraising methods for startups. It involves raising small amounts of money from many individuals through online platforms:
- Access to Capital: Crowdfunding can provide startups with access to capital that may be difficult to obtain through traditional methods such as bank loans or venture capital.
- Customer Validation: Crowdfunding can serve as a way to validate a startup’s product or idea by gauging interest and support from potential customers.
- Time-Consuming: Crowdfunding campaigns can be time-consuming and require significant effort to prepare and promote the campaign. This can divert resources and focus away from other critical business activities.
- Limited Funding: Crowdfunding campaigns may not always generate enough funding to meet a startup’s financial needs. In some cases, startups may need to turn to additional fundraising methods to secure enough capital to grow their business.
Tunc Kurtoglu, Editor, Daily Finances