In the wake of tight credit markets in
North America, crowdfunding or crowdsourcing, has quickly become a source of
readily available financing to startups, charities or projects. This form of
financing is extremely popular with the creative industry such as
documentaries, artists and writers.
This new form of financing allows a person
to get funding through small contributions from a large group of individuals through
an online platform. The entrepreneur makes
an online pitch to a community, which then decides if they want to support the project
by giving money towards it.
Raising funds for your small business by
crowdfunding has its own set of dangers that can be harmful to your company’s
success. Here are the top five reasons
to avoid crowdfunding as a financing option.
Crowdfunding is not meant
for large projects.
If you need a
million plus dollars to get your business up and running, crowdfunding is
probably not the best source for you. Yes, there have been exceptions, but raising
the large pool of capital works best with venture capitalists that you can
focus on as opposed to the sometimes-scattered approach of crowdfunding. The
other thing to consider is repayment. Imagine trying to keep 1,000 investors
happy!
Crowdfunding is not sophisticated investing.
There is a kind of hip, underground vibe to crowdfunding. You could kick
in a couple of hundred dollars towards an edgy independent film and feel like you’re
part of the creative process. However, some professionals might not want to
open up their business plans for such wide scrutiny.
Crowdfunding could
impact future investments in your company.
If you're tapping into crowdfunding as source of capital, you want to
think about the longevity of your business. A single project can benefit from
the financing, but if you've giving up shares in a company that might become
extremely successful, those shares could tangle up future investment
opportunities. See "The Social Network" for a perfect example of this
dynamic playing out with billions at stake!
Crowdfunding has a
limit on share values.
The cap with crowdfunding is $1 million. If you manage to raise more than
that amount you'll be frozen out of crowdfunding for at least a year unless you
want to become involved in security registration compliance. Suppose your
company experiences rapid growth? You might be stuck if crowdfunding is your
only cash flow source.
Crowdfunding is
not a quick option.
If you need cash fast, crowdfunding is not the way to go. Once you place
your proposal up on a site you essentially have to wait until it catches
"fire." You'll also have to do a lot of your own promotion to drive
people to your plan. This process can stretch on for weeks and months. Now
consider being approved for a loan from a bank and having the funds by the end
of the week. Which works better for your plans?
