2017-12-05 00:00:00 Funding and Financing English Decide if raising capital through crowdsourcing is right for your startup or small business by learning about the downsides of peer-to-peer... https://quickbooks.intuit.com/ca/resources/ca_qrc/uploads/2017/12/Crowdsourcing-Expert-Downsides-Interested-Man.jpg https://quickbooks.intuit.com/ca/resources/funding-financing/risks-downsides-crowdsourcing-funding/ Risks and Downsides to Crowdsourcing

Risks and Downsides to Crowdsourcing

2 min read

Crowdsourcing funds can be a great alternative to traditional banking loan options for your business, but there are some risks and downsides to consider. If you’re not sure if peer-to-peer lending is the right fit for your business, weigh these cons against the pros so you can make an informed decision.

Potential Loss of Intellectual Property

When you’re seeking investments from the public, you can’t really be secretive with your product. You must be transparent and provide detailed descriptions and examples of your prototypes. Naturally, that exposure opens you up to theft of your intellectual property. There are ways around this, but they can be costly. For example, in Canada, a patent protects your idea from theft for 20 years after it’s granted, but enforcing your patent in court can take time and money. You may be able to prove that you came up with the idea first, but if you’re already struggling to fund the project, you probably don’t have a budget for legal fees.

Incorrect Valuation of Your Business

Your investors are going to want as much information as possible so they can decide if your company is worth the risk. Both you and your investors are going to have to estimate the valuation of your business, but often, those numbers don’t match. If your company ends up being worth significantly more than you’d expected, you may end up giving shareholders a substantial amount of your profits. If it falls short, you may end up with unhappy investors. Finding a compromise can be tough, as the value of your business is pure speculation at that phase.

Loss of Decision-Making Rights

They say that too many chefs spoil the soup. Well, too many investors can also put a damper on your product. When other people have a stake in your business, they may want to have a say in what you do with it. When you get funding from a bank, you still have full control of every decision you make. When other people’s money is involved, you have to tread more carefully to keep everyone happy.

Possible Negative Reputation

Some people just don’t like crowdsourcing. Depending on the industry or product, people may look down on you for not taking seeking money through traditional avenues, such as through a bank or family and friends. Some people look at crowdfunding as an entitled way to get your business off the ground without working hard, and there are plenty of people who feel the exact opposite way. If you think that a crowdfunding campaign would tarnish your company’s reputation before it even comes into fruition, you may be better off avoiding crowdfunding entirely.

Time and Money Spent Marketing Your Campaign

While you might get lucky if visitors to your crowdfunding platform happen to respond positively to your campaign, you’re probably going to have to work hard to get the word out there. You may have to put out sponsored ads on social media, post about your products on various relevant online message boards, and take other online and face-to-face marketing steps. Promoting your campaign can be a tiring, thankless, and unpaid job, and there’s no guarantee that it will even take off. At the same time, there have been countless success stories, and yours could be one of them. If you decide to crowdfund, try not to get discouraged, and be transparent, passionate, and persistent. If your product is truly innovative, it will get funded somehow.

Information may be abridged and therefore incomplete. This document/information does not constitute, and should not be considered a substitute for, legal or financial advice. Each financial situation is different, the advice provided is intended to be general. Please contact your financial or legal advisors for information specific to your situation.

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