Crowdfunding is the new phenomenon of funding for startups and is growing fast.
Crowdfunding is online funding through web sites that enables you to describe your business idea and raise money from a crowd of small investors. Some better known sites are Kickstarter , Indiegogo, Crowdcube, Seedrs with many more proliferating.
It’s a simple concept that the internet has enabled but the consequences can be complex.
Whether you’re trying to raise money or become an investor, here are some of the pros and cons to consider.
1. Crowdfunding may not comply with FSA regulations (Financial Services Authority) – there seems to be ways around this by offering freebies and discounts to investors
2. You may not raise all the funds required – if the total cash asked for is not taken up, then the transaction is not completed
3. The product is the focus and not the business model – no business plan or financial projections are usually included so how would anyone know how it would make money?
4. Entrepreneurs can put in less money – if there is less ‘skin in the game’, anyone can offer up any madcap idea
5. No due diligence – since there is less chance for meeting investors and their thorough questioning, the business idea won’t be tested properly
6. Hundreds of investors – instead of one or two knowledgeable investors, you may end up with hundreds of non experts, which is difficult to manage
7. High risk of startups – non professional investors may not understand that 9 out 10 startups can fail and stand to lose all their money
8. Intellectual property can be at risk – you cannot protect your business idea when it is described online for all to read
9. No track record of returns – with so many investments proliferating and the majority bound to fail, crowdfunding will gain a bad reputation and be more tightly regulated in future
10. Amount of funding small – crowdfunding is not suitable if you’re seeking to raise millions
1. Better for small projects, artists and non profits – great way for such projects to raise money
2. Reduces the time and effort to raise money – fund-raising is time-consuming and tedious and crowdfunding can cut through that
3. Opens up the market for small investors – probably the only way small investors can look at funding startups that are not by friends and family
4. Opens up new funding sources for small business – with bank funding more difficult to obtain, crowdfunding has enabled more funding for the smaller business
5. More ideas get funded – helps the economy and encourages entrepreneurship
Crowdfunding extends to both equity and debt and the debt raising sites offer better interest rates for investors than any bank, even after writing off bad debts.
Worldwide crowdfunding raised $2.7bn in 2012 with half that sum raised in the US (Reuters) and is expected to raise £1.9bn in the UK in 2013 (Deloitte).
Overall, opening up new avenues of funding is good for the economy but when the world economy improves and more money is available from the traditional sources for good business ideas, would crowdfunding be limited to the niche and crazy ideas only?