Crowdfunding – Cure or Curse?

Crowdfunding has become a popular choice if you have an exciting idea for a product or service, but are short of the necessary funds. Like most things, however, it has its advantages and disadvantages.

What exactly is crowdfunding? Crowdfunding raises many small amounts of money from a large number of people and is usually done via the internet. You can do this through dedicated sites, such as Kickstarter, or run your own campaign via social media. In exchange, investors look for rewards or recognition.

What are the advantages?

It provides access to capital – money that you might not otherwise have.

It allows you to get feedback and ideas. If you state you are using crowdfunding to develop a particular product, then it can be a platform for telling investors about it and getting their opinions. They might suggest further ideas or give you suggestions for how you can make your product or service even better.

It is easier than traditional applications. Applications for loans for new business services or ideas can be complex and time-consuming to fill in. Crowd funding is a lot easier, providing you can come up with compelling and irresistible reasons (and share-able material) for why your product or service is a brilliant idea.

It introduces you to potential customers. Again, many people might want to invest in your business or product because they want that kind of service or product themselves. If you have come up with a unique and brilliant idea that has market appeal, then lots of people will be attracted to that idea.

It gives you a marketing tool and PR. Crowdfunding gives you a great way to reach numerous channels as many of the platforms incorporate access to social media channels allowing you to get referral traffic to your website and your social media pages, which helps with viral marketing.

In turn, crowdfunding is a little like writing your own press release for your product or business and having it launched on a large public forum – which gives it the potential to be seen my hundreds of thousands of people. And if your new product or business is successful as a result of crowdfunding, then that is a story in itself.

It is free. If you aren’t successful and your fundraising goal isn’t achieved, then you return the funds to your contributors and there is no penalty. If you do raise the necessary funds, the crowdfunding platform will charge a fee and your contributors will look for rewards or recognition.

And what about the disadvantages?

While there are amazing success stories – Pebble Time Smartwatch raised $20.3 million via crowdfunding on Kickstarternot all projects which apply to crowd funding platforms get onto them.

Once you are on your chosen platform, you will need to do a lot of work to build up interest before the project launches and that might take up a lot of time and money.

If you do not reach your funding target, any finance that has been offered will need to be returned to your investors.

Also, if you miscalculate the rewards or returns, it can mean giving away too much of the business to your investors.

Crowdfunding is mostly unregulated (although loan-based and investment-based crowdfunding is regulated by the Financial Conduct Authority).

The cost of funds that you raise via crowdfunding (the rate of interest that you pay) may be more expensive than funding obtained via more traditional sources, i.e. bank lending, asset financing etc.

And finally, if you do not protect your product or business idea with a patent or copyright, you are running the risk of someone stealing your brilliant idea.

We hope this gives you a good overview of Crowdfunding. If you would like any help with your accounts, please do not hesitate to give me a call on 01903 713508 or email me directly: simon@bottingandco.co.uk or visit www.bottingandco.co.uk.

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