The most difficult part of developing a new product or to launching a new project after conception is finding the capital you need to get started. Fortunately, a huge number of different funding options are available to businesses today. Each comes with its own strengths and weaknesses, but one relatively new, popular, and high profile choice is increasingly attracting attention: Crowdfunding. It sounds like a perfect solution. Businesses or individuals can publicise an idea directly to the end consumer, skipping financial gatekeepers like banks and traditional investors to access raw market demand.

Crowdfunding 300x200 - The drawbacks of using crowdfunding to support growth

Crowdfunding approaches investment from a very non-traditional angle, but that doesn’t mean it really lives up to the hype. Let’s take a look at the often overlooked weaknesses of crowdfunding, and why businesses need to approach it with the same level of care and planning that they do with traditional sources of funding.

Your project needs to appeal to end consumers

Traditional investors and banks have to be convinced of an idea’s profitability before they can be convinced to provide funds. With crowdfunding, on the other hand, profitability isn’t a major concern up front. Rather, the campaign itself acts as a type of referendum on whether something might be profitable. This can look like a benefit, but it turns into a major problem if your product is in any way mundane.

Revolutionary ideas like cleaning up the oceans, or visually impressive products like hydrophobic coatings can easily engage potential customers or small investors directly. This won’t work very well, however, if you’re trying to bring a more durable roof tile or something like accounting software to market. The idea might well be profitable in practice, but it won’t generate any excitement on social media.

You need a large audience to market virally

Some products can generate a lot of excitement, but only with a relatively small and specific audience. This can also lead to problems. Smaller target groups of people are less likely to share redundant direct or indirect connections on social media, making it more difficult for them to reach each other without serious effort on their part. A potential investor that shares your fundraiser on Facebook might never reach another member of your target audience.

This can end up diminishing or killing off any potential viral effect. Since crowdfunding largely relies on this as a way to reach the public, you might find it far more difficult to engage your audience effectively.

The campaign will require time and resources to organise

Many businesses approach crowdfunding as a simple way to share their idea online, and imagine that the public will readily understand the potential of it and rush to support them. Of course, it rarely works out that way, and it’s one of the reasons that nearly two-thirds of all Kickstarter campaigns are never successfully funded. Crowdfunding is, essentially, a viral marketing campaign, and it needs to be approached the same way.

You’ll need to work with your marketing team to determine who your target audience is, how you plan to generate interest in your campaign before launch, and how to get them to support and also advocate for your business once your campaign goes live. Doing this requires your and your employees’ time and labour, and therefore also money. You’ll need to assess whether this type of campaign has a reasonable chance of success before beginning, because it could be taking away resources that would be better spent on other tasks.

Your reputation is at stake

Failing to get financing from your financial institution, or being turned down by an investor can feel like a major blow, but it isn’t a very big deal in terms of your brand’s reputation. That’s because these kinds of negotiations generally aren’t conducted in a public setting.

Your crowdfunding campaign will be clearly visible to the public as well as your competitors and existing investors. After all, you’ll be spending months working to ensure that it is. This increases your chances of success, but it also comes with a significant risk. If your campaign falls flat for any reason, your business looks weak, and might suffer a loss in public and investor confidence.

Your ideas may spread too fast

Beside the risk of a failed campaign, a highly public outreach event like this can lead to another problem. Not every clever innovation can be patented, and smaller businesses may need more time and effort to realise their vision than a larger, better funded competitor. It’s important to assess how secure your business’ ownership of an idea is before you can safely publicise it.

Crowdfunding can be an excellent solution for small businesses in need of capital to fund growth opportunities, but it needs to be approached with care. Before you launch your own campaign, be sure that it isn’t vulnerable to these weaknesses. For alternative financing options, reach out to our representatives at Fifo Capital for a free consultation.

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