Began by President Obama’s JOBS act which encourages the funding of small businesses in the United States, crowdfunding has developed into a huge benefit for startups. By definition crowdfunding is “the practice of funding a project or venture by raising many small amounts of money from a large number of people, typically via the Internet”. Thus, crowdfunding has become the champion of small businesses, allowing them to have a chance to succeed by showing their innovate business models to the world.
Crowdfunding may seem as a childish game, but in reality it’s a way to validate one’s ideas before they become a reality. It involves preparation and readiness to protect the idea and convince others that it’s worth their investments. One of the most important tools to gather an audience that will evaluate the idea is social media. All successful crowdfunding projects have been extremely active on social media, customizing the promotion for each particular channel and reaching a wide scope of people. Some projects even choose to use videos as tools to attract more visitors. As interest in the project grows, one has to keep the communication with investors and interested visitors constant and provide updates. Yes, the investments are the goal of crowdfunding, but the communication with all interested should be kept personal without a every-day mention of money. Thus, one can not only succeed in gathering funding, but also build a customer base from which the product can have its start.
The most obvious benefit of crowdfunding for entrepreneurs is the funding. With so many startups on the market, it is hard to gather the money needed to bring ideas to life. Through crowdfunding, ventures can gain support at the very beginning. Crowdfunding provides a way for innovate ideas to be presented attractively, so it can be launched. Moreover, a crowdfunding platform can help successful entrepreneurs to validate their product which can then help with gathering the Series A funding. It makes validation faster and more scalable. Additionally, a crowdfunding platform allows entrepreneurs to get insights from their future customers and experts in the startup field while building awareness for the idea.
Entrepreneurs, however, are not the only ones benefiting from a good crowdfunding platform. Investors are allowed to take a deep look into their investments before they risk money. On top of that, networking on crowdfunding campaigns allow for investors to have an easy approach to entrepreneurs. It lessens the preparation that goes into investments because of the more personal feel of crowdfunding.
Crowdfunding does seem like a great option for entrepreneurs with innovate ideas, but it does have some drawbacks. Yes, it is an easy way to raise awareness, but at the same time, it involves an enormous amount of work with months in preparation to build a good relationship with investors. One thing to remember, however, is that the entrepreneur does not choose his investors which leads to unclear boundaries in the process. In addition, depending on the platform, entrepreneurs have to pay out between 8% and 12% of their raise which has to be budgeted in. Moreover, crowdfunding platforms usually require through reporting and disclosure procedures that are strictly followed, making every step of the entrepreneur difficult. Due diligence is also absent as investors can contribute very small amounts, so are not particularly concerned with it. Finally, the low percentage of success in crowdfunding is the main disadvantage. About 60% of campaigns do not make it. From those who do, only half make more than 10% over their goal. If the campaign is not successful, investors usually get their money back. With its unclear boundaries between investors and entrepreneurs, much regulations, lack of due diligence, and most importantly low success rate, crowdfunding does have its disadvantages.
(text found on https://www.finleap.com/insights/fintech-trends-crowdfunding/)
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