The Pros and Cons of Crowdfunding

by Jake Martin, Title Text

4 min read

It is customary to begin any article on the subject of crowdfunding with some clichés about technology and how the world is changing. The truth is, that while there are a variety of innovative crowdfunding websites, the growth of this revenue model has a lot to do with the lack of alternative sources of capital.

Crowdfunding fills a niche that was left by banks being less liberal with loans after the global financial crisis. But even though banks have again started lending to SME’s, crowdfunding remains a more attractive option for certain kinds of start-ups.

A 2014 survey by Nesta showed that the majority of crowdfunding is equity based, accounting for £84 million raised that year. But the survey also revealed that crowdlending or “P2P” is the future; enabling businesses to raise £749 million in the same year. Whatever the economic future of Britain may hold after Brexit, we can be certain that crowdfunding will represent an important source of finance to a variety of small businesses and charitable organisations.

The Benefits of Crowdfunding

PR

There’s more to funding than just the money. One of the fortunate side effects of a crowdfunding campaign is that it generates awareness. Most of the crowdfunding websites from Kickstarter to Indiegogo all bestow a degree of legitimacy on the organisations that use them. When you are disseminating marketing material to attract investors, you are also spreading a buzz about what you do and this has a value of its own. These crowdfunding websites often have established communities, including some wealthy patrons, who can help to spread the word about what you are doing (if they like your pitch, that is).

Market Insight

People who invest via crowdfunding websites do so because they wholeheartedly believe in the product. They are usually keen on interacting; asking questions, offering criticism and suggesting changes. You can gain diverse insights from reaching out to these investors. The fact that they invest in the first place demonstrates the clear value of your company, but you can get a more detailed understanding of how they perceive that value by speaking with them directly. These insights are invaluable to many SME’s.

Sustainable Income

While most companies regard crowdfunding merely as a way to get the ball rolling, for individual artists and creatives, it can be a sustainable and ongoing source of income. Sites like Pozible provide access to experienced investors who are ready to advise creators on their content and also donate to them. Creators have to pay for the service though; campaigns that raise up to $100,000, pay a fee of 5%, plus 2.4% for transactions.

Patreon  is one of the easiest and most efficient crowdfunding sites for creatives. The musician Amanda Palmer now earns over £26,500 for each song or video she uploads, and she creates 2-4 things a month. The Patreon revenue model, which puts content creators and viewers in direct contact, is probably the future of funding for entertainers. It is far more appealing for creatives than the options on which they had previously depended; either ad revenue or begging for help from record-companies, art galleries, film festivals etc.

 

The Problem with Crowdfunding

No Business Support

While you can source funding and even advice, you could be selling up equity in your company to shareholders with no practical knowledge of your industry. Small businesses need more than just money and consumer insight to get going. They need contacts, insider knowledge and expert advice too. Finding an investor who brings more than just cash to the table may be more valuable in the long run than a great number of clueless crowd-funders.

Not Profit Oriented

With crowdfunding, you address the masses rather than an established entrepreneur or a bank. While the latter will judge you on the bottom line, the feasibility of the idea and its market potential, the crowd, on the other hand, may be won over by sentimental pleas and irrational impulses. It is for this reason that charities, NGO’s and quirky, unusual start-ups with a human story can really succeed with the format. If your organisation is founded on some ethical or ideological principle then you can win support for it by appealing to people’s emotions in a crowdfunding campaign, but if your main concern is just money, then you are probably better off looking at more conventional funding options.

Conclusion

Analysts such as those at Nesta agree that the failure of British banks to lend sufficiently to businesses renders crowdfunding an attractive alternative. That being said, crowdfunding isn’t for everyone and you must choose an appropriate web site through which to raise funds if you choose to go down this route. Crowdfunding also entails a great deal of work; you must develop a story that defines your business and you must communicate this effectively through marketing initiatives across multiple platforms, if you are to succeed.

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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