A startup requires capital which would be used to set up a shop, stock inventory, launch a marketing campaign, and so on. It often relies on funds provided by people within the immediate network of the entrepreneur. Family members and friends, in addition to the personal savings of the entrepreneur help to provide the required startup capital. This is often the easiest means of obtaining funds for a startup. Options outside the immediate network of the entrepreneur, such as angel investors and loans from banks, become the next available options when personal savings and contributions from family and friends are not enough. Most of the time, these second alternatives are not so easy to obtain.
What is crowdfunding?
Crowdfunding is the pooling together of a large number of people to raise money that would be used to fund a project or venture. Each person contributes a small percentage of the needed funds. Crowdfunding is usually done via the internet, which makes it easy to attract as many people as possible.
In recent times, with the advent of crowdfunding, startups have the opportunity to conveniently gather funds from the public.
Benefits of Crowdfunding a Startup
- Saves time and money: setting up a crowdfunding strategy is much easier and takes far lesser time to raise the required capital than approaching banks and private investors. It eliminates the need for constant pitching, negotiating, and prospecting.
- Helps in establishing a customer base: raising funds for a startup through crowdfunding basically means having a very large number of people backing your business. Many of these people not only become part of your customer base, but also part of your sales force as they get involved in promoting the business. One of the biggest challenges for startups is how to spread word about the new business and many spend a lot of time trying to get the business noticed in the organic search world. Crowdfunding , therefore, provides a two way advantage in this regard.
- Gives control over how to reward investors: crowdfunding often makes use of reward based incentives to compensate investors, rather than having to give up equity in the business. The startup also has control over the percentage interest offered to investors.
- Provides an honest feedback: if a startup finds it difficult to attract people to invest, even after observing best practices in the crowdfunding campaign, it could mean that the startup idea does meet the needs of the public and won’t be able to create much value.
Drawbacks
- Makes startup inflexible: as soon as the contributions have been made, it becomes difficult to make any considerable changes to the initial startup idea. Also, any delays in the stated timeline would damage the reputation of the business.
- Often adopts an all-or-nothing approach: some crowdfunding platforms only release the contributed funds when it has achieved or exceeded 100% of the stated startup capital. This puts the startup on hold, even after a considerable amount has been obtained.
- The startup bears the administrative burden: the startup bears all the burden of administrating investors, which often involves a great deal of paperwork, the need to provide regular reports, and having to handle a large number of investors who are often inquisitive as to how the business is being run.
