Some start-ups are fortunate to raise funds from institutional investors while some founders receive grants or financial support from friends or families. For others, they may need to resort to crowdfunding.
Despite the excitements around increasing access to venture capital and angel investing, crowdfunding is one source of funding that is also gaining more popularity. As the name suggests, crowdfunding involves getting a ‘crowd’ to fund your business, with the method adopted ultimately defining the type of ‘crowd’ and their participation. Crowdfunding can be done using a reward system where people are promised a certain reward like a special offer in the future. Crowdfunding can also be equity based and this means that financiers of your business get a stake in ownership of your business. On the other hand, debt-based crowdfunding is when the investors will receive interest on their money when they are paid back but they would have no percentage ownership of your business. However, it doesn’t matter the method adopted, one consistent feature in crowdfunding is that it is done with a financial target and if that target is not met, the money gotten from people would be returned back to them.
Crowdfunding is obviously gaining more acceptance and many online platforms like kickstarter and Crowdfunder are making it easier for businesses to seek funds from the public in a less formal way compared to institutional investors or banks. However, the efficiency of crowdfunding as a source of finance for business is usually questioned. The concern surrounding crowdfunding is even bigger for start-ups. Start-ups have a higher tendency to fail compared to the more established businesses. Start-ups would also benefit from other forms of support like mentorship and guidance when they instead raise money from institutional investors.
Therefore, it is really important to ask if crowdfunding a start-up is a bad idea. Before we can actually give a definite answer to this question, we need to consider some of the reasons why it might seem like a bad idea then compare these reasons with the benefits start-ups can gain from crowdfunding.
Firstly, it is important to understand that crowdfunding has a direct relationship with the reputation of your start-up. Start-ups are very delicate and are usually iterating in order to fully understand the market and attain product-market fit. Crowdfunding ultimately puts your start-up ‘out there’ with an assurance that you know what you are doing and are considerably sure of success. The disadvantage of this is that start-ups may no longer have the needed luxury of ‘testing’ the market and iterating. The moment a start-up begins to request to be crowdfunded, the public expects that it has figured out almost everything about the market, which is hardly the case for any start-up.
However, on the other hand, crowdfunding can actually be a platform for providing start-ups with the valuable information they need to become successful and maintain their present path. One major uncertainty that surrounds start-ups is the inability to determine if they are actually on the right path because they can’t predict the reaction of customers or the market to their product or service. Crowdfunding can however act as a feedback channel from potential customers and even experts. Crowdfunding can act as a means of measuring people’s interest in your product because if people react positively by funding your start-up, then you know you are on to something. Your start-up can even attract experts in your industries who are willing to give you advice and tips to even become more successful. Obviously, it can be painful if a crowdfunding process fails because you would have to return whatever fund had been raised and also face the shame of your product or service not being wanted, one could however still take solace from the fact that crowdfunding allows you know the perception of the market towards your product or service.
However, on the other hand, crowdfunding can actually be a platform for providing start-ups with the valuable information they need to become successful and maintain their present path. One major uncertainty that surrounds start-ups is the inability to determine if they are actually on the right path because they can’t predict the reaction of customers or the market to their product or service. Crowdfunding can however act as a feedback channel from potential customers and even experts. Crowdfunding can act as a means of measuring people’s interest in your product because if people react positively by funding your start-up, then you know you are on to something. Your start-up can even attract experts in your industries who are willing to give you advice and tips to even become more successful. Obviously, it can be painful if a crowdfunding process fails because you would have to return whatever fund had been raised and also face the shame of your product or service not being wanted, one could however still take solace from the fact that crowdfunding allows you know the perception of the market towards your product or service.
Another fear around crowdfunding a start-up is that your business can gain too much exposure. In order to convince people to help you reach your funding target, you would have to convince the potential financers about the structure and unique selling points of your business. Established businesses have built enough structures and market presence that ensures that even if they reveal some of their strategies, they are not vulnerable to their competitors. Start-ups on the other hand do not have this luxury. A start-up barely has enough customers and is usually wary of revealing its unique strategies because of how vulnerable they are to incumbents in the industry and other competing start-ups. Hence, crowdfunding can considerably make a start-up vulnerable to its competitors.
However, despite the possibility of this over exposure, crowdfunding can actually become a marketing platform for a start-up while also making it a possible ‘public favorite’. As a start-up seeks to be crowdfunded, it automatically markets its business to the world. This form of marketing can be very viral as well-wishers can ultimately begin to retweet or share the start-up on their social media pages in order to help it gain more reach. Hence, crowdfunding can actually help the start-up gain immense online presence and reach which is very valuable in a digitally dominated economy. This increase in online presence can also make the start-up noticeable by institutional investors who have never heard of the start-up. These investors can reach out to the start-up to ultimately fund the business or provide other forms of incubation or support.
Final Note
Start-ups are generally hard. Uncertainties are the most difficult aspects of building a start-up because despite everything a founder might do, no one can totally predict the reaction of the market. This is why start-ups need funding to survive. Adequate capital and funding help start-ups to navigate the ever-uncertain waters of the market. Some start-ups are fortunate to raise funds from institutional investors while some founders receive grants or financial support from friends or families. For others, they may need to resort to crowdfunding and this article has highlighted the dangers and potential benefits of crowdfunding.
Although, it is hard to categorically say if crowdfunding a start-up is a good or bad idea, the evidences however point to the fact that crowdfunding provides a start-up with a bit of clarity by letting it know its position in the market and what may need to be improved. Also, besides the clarity that crowdfunding may bring to a business, successful crowdfunding ultimately provides a start-up with the funding it needs.