Crowdfunding Planning Understands The Pros & Cons of Crowdfunding

posted May 31, 2013, 9:49 AM by Andrew Manzo   [ updated Jun 5, 2013, 10:39 AM ]
Like any funding method, Crowdfunding has its pros and cons; and I want you to be fully informed with a plan for addressing each of them.

The Pros

One of the key benefits of Crowdfunding is that it's a very simple method of getting funding.

And particularly, it allows you to raise money from unaccredited investors without the myriad legal issues that often arise with these investors.

Importantly, Crowdfunding makes it possible for good ideas that do not appeal to conventional investors to get financing from the crowd. Not only does Crowdfunding provide money to start a project, is also secures evidence of support from potential customers. In addition, it also contributes to word-of-mouth advertising.

An entrepreneur who uses Crowdfunding generally uses websites to solicit small contributions from people who are not typical financiers. 

There are a number of different variations:

1) The entrepreneur may solicit pledges to back an idea in which no material is offered in return for pledges. This type of Crowdfunding has long been used for artistic patronage or charity fundraising. The other variation, which has recently become extremely popular, is when the entrepreneur gives rewards (typically the product or service they are developing) in return for pledges.

2) At times, the threshold approach to Crowdfunding is used. When this type of Crowdfunding is used, unless the threshold amount is raised by the set deadline, all of the pledges will be voided.

Now for the Disadvantages

In spite of the many advantages to Crowdfunding, there is one big potential disadvantage. When someone solicits Crowdfunding, one of the requirements is to disclose the idea that needs funding. 

This exposes the idea's owner to the risk of his/her project being copied by competitors who have better financing. If the competition releases the idea before funding can be raised, the owner of the original idea risks losing market share.

For example, an entrepreneur has developed a new type of toothpaste that better prevents cavities. However, this unknown inventor lacks the necessary funds to get the project off of the ground, so he/she turns to Crowdfunding. An executive at Colgate-Palmolive sees the campaign, and before the entrepreneur has time to collect the funding that he or she needs, the product is on the shelf with the larger company's name on it. 

However, while many entrepreneurs are paranoid about their ideas being stolen, this risk doesn't bother me at all. Why? Because while your ideas are important, executing on them is more important. And most people who hear your idea just won't be able to execute. And realize that once you introduce your idea to the market, if it's good enough, others WILL copy it. So, focus on executing on your idea, not protecting it (unless there is intellectual property you can file, in which case, do so).

Likewise, with regards to large companies taking your idea, like in the toothpaste example above, this is not a big concern. Large companies are generally very poor at launching new products (and it takes them a long time to do), and they prefer to wait to see if your product will be successful. And if your product is successful, they are generally prone to buy your company versus building a competitive product from scratch.

A second downside of Crowdfunding is that it's not right for all types of ventures. It's perfect if you don't need millions of dollars in funding, and if you can use that funding to quickly create your product or service. Conversely, if you need millions of dollars to develop a new technology that may take years of R&D, Crowdfunding is not right for you since the return period is too long. In such a case, angel and venture capital investors are better suited for you.

In summary Crowdfunding has the key advantages of being quick and easy to raise, while also helping you build a customer base. The potential disadvantage of it exposing your idea to competitors and/or copycats is over-rated; it's just not that big a deal.