August 6, 2020  
 
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Crowd Funding

 

Crowd Funding Disadvantages

Sure, crowd funding sounds fantastic. But there are also some serious disadvantages that should make any thoughtful entrepreneur think twice about using crowd funding as a way to raise capital for a new venture.

There are several important benefits that can be gained from crowd funding.
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Unlike other forms of funding, crowd funding exposes your project to vast hoards of potential investors and funders. Under the right conditions, the result can be a groundswell of support and publicity for your cause.

Although crowd funding is a relatively new phenomenon, it is a technique that has been successfully employed by nonprofits and creative individuals/organizations. In recent years entrepreneurs have also dipped their feet in the water. However, there are reasons why crowd funding may not be the best vehicle for small businesses.

As an informed small business owner, here are some of the crowd funding disadvantages you need to be aware of.

  • Small dollar amounts. If your crowd funding campaign is successful you will raise small amounts of money from a large number of funders. But for a small business, that's the problem. Instead of raising significant levels of capital from targeted investors the dollar amounts are much smaller. The most successful crowd funding projects don't come close to generating the kind of funds you need to really get your business off the ground.
  • Ignores business models. One of the advantages of pitching your startup to traditional investors is that you gain important insights about your business model. Crowd funding enthusiasts usually lack the expertise and capacity to provide meaningful feedback about your business model. In fact, the limitations involved with listing your request on a crowd funding website make it impossible to adequately describe your company's business structure to prospects.
  • No long-term viability. It's one thing to use crowd funding as a vehicle for resourcing a one-time project or special event. If your company wants to fund a small study about the impact of cell phone technology on frogs in the Amazon, crowd funding is definitely the way to go. But as a long-term funding strategy it's just not a viable for the ongoing resource needs of a small business.
  • Risk of exposure. Crowd funding seems innocent enough. But it's possible that it could expose your business to risks you didn't anticipate. For starters, crowd funding requires you to expose project details on the Internet, potentially giving your competitors inside information about your business. In certain situations crowd funding can even expose your company to securities violations.

Conversation Board

What's your take on the disadvantages of crowd funding as a way to raise money? We welcome your questions, comments and advice.


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