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Growing enterprises and established companies are using crowdfunding investment opportunities more and more often to obtain capital. It seems simple: just register with a reputable crowdfunding website, list your financial requirements, click a few buttons, and money magically appears. Of fact, it’s not that simple to use crowdsourcing to raise money for your company. Before you start your next campaign, educate yourself about the benefits and drawbacks of crowdfunding.
What is Crowdfunding Investment?
Crowdfunding investment is the practice of raising capital by soliciting small individual investors to contribute funds to your business or project through an online platform. There are two main types of crowdfunding investment: rewards-based crowdfunding and equity crowdfunding. Rewards-based crowdfunding involves offering a product or service in exchange for funding. Equity crowdfunding involves offering shares in the company to investors in exchange for their investment.
Crowdfunding investment opportunities can be classified into two categories, each with its own pros and cons. Rewards-based crowdfunding is ideal for gaining a devoted following, but some platforms may not allow access to the funds raised if you fall short of your fundraising target. Equity crowdfunding can raise millions of dollars for your business, but you must swap equity in your company to do so. Running a successful crowdfunding campaign requires a lot of preparation, effort, and commitment, and success is never guaranteed.
Pros and cons of crowdfunding investment opportunities:
Before moving further, weigh the advantages and disadvantages of business crowdfunding.
| Pros of crowdfunding investment | Cons of crowdfunding investment |
| Low overall risk with a possible payout of significant value | low rate of success |
| Expanded exposure | long period of preparation |
| Audience already present and centralized communication | Having trouble getting noticed |
| Helps you avoid compromising company equity. | High upfront costs |
| modest individual donations by small investors | The community is rife with trolls and scammers. |
| novel possibilities | Risk to reputation |
| gained momentum | False positives |
An effective option for a startup to get early capital without taking on debt or giving up stock in their business is through crowdfunding. The process of raising money through crowdsourcing may be pretty simple, and there are several excellent platforms to select from.
Benefits of Crowdfunding Investment
Expanded Exposure
Crowdfunding investment opportunities provide businesses with an opportunity to gain exposure to a larger audience. By posting their projects on crowdfunding platforms, businesses can reach potential investors who may not have heard about their business otherwise. This exposure can also help businesses gain new customers and build brand awareness.
Low Overall Risk with a Possible Payout of Significant Value
One of the biggest advantages of crowdfunding investment is the low overall risk associated with it. Crowdfunding allows businesses to raise capital without having to take on debt or give up equity in their company. Additionally, since the investment is often made by a large number of small investors, the risk is spread out among them. This means that if the business is successful, the investors can potentially receive a significant payout for their investment.
Modest Individual Donations by Small Investors
Crowdfunding investment opportunities allow businesses to receive donations from a large number of individual investors. These individual investments are often small in size, which means that businesses can raise capital without having to rely on a few large investors. This also means that small investors can contribute to the success of a business they believe in, even if they do not have a large amount of capital to invest.
Novel Possibilities
Crowdfunding investment opportunities allow businesses to present novel ideas and concepts to potential investors. This means that businesses can explore new and innovative ideas that may not have been funded through traditional financing methods. This also means that investors can invest in ideas they believe in, regardless of whether they fit into traditional investment categories.
Gained Momentum
Crowdfunding investment opportunities often create a sense of momentum around a project or business. As more people invest in a project, others may become more interested in it and also invest. This momentum can help businesses reach their fundraising goals faster and create a sense of community around their project or business.
Drawbacks of Crowdfunding Investment
Low Rate of Success
One of the biggest drawbacks of crowdfunding investment is the low rate of success. According to a study by Kickstarter, only 36% of projects on their platform are successfully funded. This means that businesses may spend a lot of time and effort creating a crowdfunding campaign, only to have it fail to reach its fundraising goals.
Long Period of Preparation
Creating a successful crowdfunding campaign takes a lot of preparation and effort. Businesses need to create a compelling pitch, set fundraising goals, create rewards or equity offerings, and market their campaign to potential investors. This can take a lot of time and resources, and businesses may need to devote significant resources to the campaign for several weeks or even months.
Having Trouble Getting Noticed
With so many projects on crowdfunding platforms, businesses may have trouble getting noticed by potential investors. This means that businesses may need to invest in marketing or advertising to reach a larger audience. Additionally, businesses may need to rely on their own network of contacts to reach their fundraising goals.
Popular crowdfunding platforms
Here are some popular crowdfunding platforms with links to their websites:
- Kickstarter: https://www.kickstarter.com/
- Indiegogo: https://www.indiegogo.com/
- GoFundMe: https://www.gofundme.com/
- Patreon: https://www.patreon.com/
- SeedInvest: https://www.seedinvest.com/
- Crowdfunder: https://www.crowdfunder.com/
- Fundable: https://www.fundable.com/
- StartEngine: https://www.startengine.com/
- Republic: https://republic.co/
- AngelList: https://angel.co/
Please note that this is not an exhaustive list and there are many other crowdfunding platforms available for different types of projects and businesses. It’s important to do your own research and choose a platform that aligns with your goals and needs.
Crowdfunding Alternatives for Business
While crowdfunding may be a great option for startups looking to raise capital, it may not be the best option for all businesses. There are several other excellent alternatives for startup finance that businesses can consider:
Small Business Administration (SBA) Startup Financing:
Obtaining an SBA startup loan can be a lot of work, but it’s an excellent way to finance a startup. The SBA offers working capital loans for up to $50,000. These loans are backed by the SBA, which makes them less risky for lenders, and easier for borrowers to obtain. For more information visit Small Business Administration
Rollover for Business Startups (ROBS):
If you have at least $50,000 available from your retirement funds, you can use it to support your startup through a ROBS. This approach is unique because it allows entrepreneurs to invest their own retirement funds into their businesses without incurring any penalties or taxes. IRS – Information on ROBS from the Internal Revenue Service
Grants for Small Enterprises:
Both government agencies and charitable organizations provide grants for small businesses. While this option does not require businesses to pay back any money, they must comply with the guidelines and application procedures. To view the list of government grants and start the application process, businesses can visit grants.gov.
Conclusion
Startups seeking to raise capital for a new product or service may consider crowdfunding as a viable option. A successful crowdfunding effort can help a company establish a client and investor base, which can ensure future success. However, crowdfunding campaigns often fall short, and even those that are successful can encounter issues if promises are not kept. Therefore, before embarking on a crowdfunding campaign, businesses must assess the benefits and drawbacks of crowdsourcing, speak with potential business partners as well as legal and financial consultants, and explore other financing options.
Disclaimer: The information provided in this article is for educational purposes only and should not be considered as financial or legal advice. Readers are encouraged to conduct their own research and seek professional advice before making any financial decisions. The author and publisher of this article are not responsible for any consequences that may arise from the use of this information.
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