It may seem like everyone is a proponent of crowdfunding now, but sometimes, it’s actuallynotthe best option for your business. Turns out asking a large group of strangers for funding isn’t all it’s cracked up to be—depending on your business, of course.
We asked a panel of nine entrepreneurs the following question:What’s one good reason NOT to crowdfund your next product/project?
This is what they had to say:
1. Crowdfunding eliminates your networking
Good investment is 20 percent money and 80 percent networking, expertise and experience. With crowdfunding, it is really unlikely that you will get the same level of engagement from the investors that you would from other avenues. Therefore, the expertise and network brought to bear on your project will be less than ideal.
–Brennan White,Watchtower
2. Crowdfunding wears your company out
Crowdfunding is hard; it’s a major marketing campaign that ends with jumping straight into producing your product. When you add in that any company that uses crowdfunding almost certainly has to juggle existing customers and continue marketing well after the campaign, you can be facing a crushing workload.
–ThursdayBram,Hyper Modern Consulting
3. Logistics must be handled first
I quickly learned that there is an awful lot to line up (from a logistics standpoint) in the short time that your campaign exists. If it’s a physical product, there is shipping, fulfillment, manufacturing, customer service channels, e-commerce development, sales, marketing and PR. If you don’t have a firm handle on all of these, you’re not ready to be at 200 percent of your goal.
–Adam Callinan,BottleKeeper
4. Crowdfunding comes with a ticking clock
Delivering your product or service comes with a ticking time clock. This happens especially when you are on a crowdfunding site with consumer products or hardware. Developing your business with a ticking time clock and Kickstarter backers can be much more stressful and less useful than having a group of investors who will help you deliver a solid product to market.
–Brett Farmiloe,Internet Marketing Agency
5. Someone can steal your idea
If you haven’t made your product yet, crowdfunding can expose your unique product or concept to competitors (or potential competitors) and make it susceptible to IP theft. A well-funded or fast-moving competitor could potentially put your product or idea to market before your crowdfunding period has ended.
–Andrew Saladino,Just Bath Vanities
6. Crowdfunding means another boss
Crowdfunding comes with a lot of fulfillment requirements and people you need to answer to. The alternative is having very few investors (or possibly only one) who know how to invest and whom you can close with one transaction. In the end, one transaction and one relationship is easier to manage than many.
–Andy Karuza,Brandbuddee
7. Diligence requirements aren’t always mandatory
With crowdfunding, due diligence requirements could go out the window. Amateur investors contributing their $10 to a startup are unlikely to require such diligence. This could result in unprepared companies without solid business plans—not the kind of company that could ever get institutional funding on a larger scale.
–David Ehrenberg,Early Growth Financial Services
8. Crowdfunding comes with some deal-breakers
The JOBS Act is meant to legalize crowdfunding, but it also has a scary provision entrepreneurs should run away from. Under the original Act, if you raise money through crowdfunding, directors and senior management could be personally sued. It pierces the corporate veil—the entire benefit of forming a company—which limits liability. Keep an eye on the SEC’s interpretations.
–Elias Bizannes, SV Foundry
9. You lose your opportunity window
Launching your minimum viable product (MVP) shouldn’t require crowdfunding. It takes weeks or months of planning and implementation to launch a successful crowdfunding campaign. You risk losing your opportunity window while focusing on raising funds. It’s no different than spending time putting together a slide deck and campaigning for investors. Avoid fundraising for as long as possible.
–Jared Brown,Hubstaff
Scott Gerber is the founder of the Young Entrepreneur Council (YEC), an invite-only organization comprised of the world's most promising young entrepreneurs. In partnership with Citi, YEC recently launched BusinessCollective, a free virtual mentorship program that helps millions of entrepreneurs start and grow businesses.
FAQs
Crowdfunding cons
- Crowdfunding doesn't “find investors” for you. ...
- Crowdfunding is full of scammers. ...
- Crowdfunding is a lot of work. ...
- You can get false positives. ...
- Endorsem*nt has minimal value. ...
- Crowdfunding takes a lot of preparation. ...
- Crowdfunding can be expensive. ...
- Negative feedback can be rough.
Crowdfunding eliminates your networking
Good investment is 20 percent money and 80 percent networking, expertise and experience. With crowdfunding, it is really unlikely that you will get the same level of engagement from the investors that you would from other avenues.
What is the main risk of participating in a crowdfunding project? ›
Potential disadvantages of crowdfunding include the possible damage to your or your company's reputation from using crowdfunding, the fees associated with the platform, and the risk that if you don't reach your funding goal, the pledged funds will be returned to investors, leaving you with nothing.
Why do you think some ideas fail in getting any crowdfunding? ›
Unrealistic goals and lack of planning
The first crowdfunding pitfall you want to avoid, though, is setting an unrealistic goal. In the realm of crowdfunding, the subjectivity of what is considered a failure can handicap you from the start. Let's say you define success as raising at least $1,000,000 for your product.
What are the risks of crowdfunding? ›
Startups and early-stage ventures can and do fail, and you could lose your entire investment. In addition, crowdfunding investments carry liquidity risks, as you'll be limited in your ability to resell your investment for the first year—and you might need to hold your investment indefinitely.
What is an example of bad crowdfunding? ›
The most notorious example of cheat is the 3D printer and scanner Peachy Printer. This device managed to collect funds amounting to 651 000 US dollars (which is 1302% of the goal). The device was to cost 100 US dollars, and its creators have advertised it as the most affordable printer in the world.
What is the dark side of crowdfunding? ›
However, crowdfunding platforms also have several disadvantages. Donation-based crowdfunding, which relies on people's passion for a cause and their willingness to contribute rather than on revenue generated from the sale of tangible products, may be a less reliable and predictable funding source.
What is the biggest challenge of crowdfunding? ›
Crowdfunding: 5 Key Challenges and How to Overcome Them
- Meeting Investor Expectations. ...
- Building Trust Among Investors. ...
- Knowing How Much Money to Ask For. ...
- Choosing the Right Platform. ...
- Protecting Your Unique Ideas.
Despite the good intention of funders to help others, lack of transparency and loopholes jeopardize the reputation of crowdsourcing. Some of the more common frauds in crowdfunding include funding misapplication, impersonation, faked illness, and failure to deliver promised rewards [3].
What are the ethical issues of crowdfunding? ›
Ethical issues for donors
Crowdfunding does not just affect campaigners, but also donors. Some pages may be obviously fraudulent, 4 others better disguised, particularly if the page creator is medically literate. In other cases, donors may be more subtly misled.
There are websites specifically for these types of campaigns. While crowdfunding websites take a percentage of the money raised as a fee, crowdfunding donations don't have to be repaid like a loan.
Is crowdfunding high risk? ›
Investments offered on this platform are not readily realisable, which means that they may be difficult to sell and you may not get back the full amount invested. Investments are not covered by the Financial Services Compensation Scheme (FSCS) and your capital is at risk and returns are not guaranteed.
What is a negative effect of crowdfunding? ›
Pros of crowdfunding include being able to get money that you don't have to repay or borrowing more than you could using traditional methods. Cons of crowdfunding include the potential of not meeting goals and exposing yourself to the public.
Why not crowdfunding? ›
It's Not Free, in Fact, It Can Be Costly
Marketing and Promotion: A successful crowdfunding campaign requires extensive marketing to reach potential backers. This includes creating promotional videos, running social media ads, and possibly hiring PR firms to generate buzz.
Can crowdfunding be misleading? ›
Crowdfunding scams are when a crowdfunding campaign asks for and accepts donations through false pretenses, misleading people about the outcome, nature of the project, or cause being solicited for.
Does crowdfunding have to be paid back? ›
There are websites specifically for these types of campaigns. While crowdfunding websites take a percentage of the money raised as a fee, crowdfunding donations don't have to be repaid like a loan.
Can crowdfunding be trusted? ›
Some of the risks include: Fraudulent campaigns: when the company misleads investors and misuses the money. The fundraising platform could be fake and used to gather people's financial information or invest in counterfeit companies.
What happens if crowdfunding fails? ›
This means that if a campaign doesn't hit its funding goal, all the pledges are canceled and the project creator doesn't receive any of the pledged funds. All the money pledged by backers is returned to them and no money exchanges hands. It's not an ideal situation, but creators should be prepared for this outcome.
