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What are the pros and cons of crowdfunding?

Published by Salvador Briggman. Find him on Twitter.

Although this blog largely focuses on tips distilled from interviews of wildly successful crowdfunders, I’m a firm believer that crowdfunding is not for everyone. Whether you are a startup with a cool new technology product or a non-profit looking to raise funds for a socially good mission, there are tradeoffs and costs that come with launching a crowdfunding campaign. Be sure to consider some of the points below!

Kickstarter/Indiegogo and Other Rewards-Based Crowdfunding Sites

hands-462297_1280One of the most common types of crowdfunding is what is referred to as “rewards-based crowdfunding.” This is when a creator will launch a project on Kickstarter or Indiegogo and offers ‘rewards’ or ‘perks’ to individuals who pledge to his or her project.

For example, you might offer a discounted early-adopter version of your product on Kickstarter or the ability to own a company-branded sweater. There are a lot of different rewards you can offer to backers at the lower and upper pledge tiers.

Typically, these types of projects are either “all-or-nothing,” meaning that the creator must hit their fundraising goal before the campaign’s deadline, or “keep-what-you-raise,” which means that no matter how much the creator raises, they will be able to keep the funds.

Pros:

– You do not have to give away equity in your business or intellectual property rights.

– You can take advantage of your backer’s social media clout to help spread the word about your new project and reach new customers.

– Major platforms have a backer community, meaning that if people like your project, you have the chance to receive pledges from strangers.

– You can get feedback early-on in the innovation process through the comments section of your projects and on updates.

– Backers and pledges can be used a validation of your target market. This is data you can bring to angel investors or venture capitalists for future investment.

Cons: 

– You must invest time and money in creating an attractive project page, brainstorm rewards, and make a compelling video.

– You must pay taxes on any pledges that are not donations and that are not used in the creation of the rewards for backers. For more information, see our tax guide.  It’s unlikely that you will make much profit on the funding round. This is because you must invest most of the money in fulfilling the rewards that you promised backers. For a realistic idea of the kinds of profits you can make, check out my other post.

– You risk the chance of having your product or idea ripped off. I think this point is also true of any kind of public launch, especially if the product is easily replicable. Trademarks and patents do provide some defensibility, but they are hard to enforce internationally.

– You must spend time marketing the project, reaching out to reporters, and being attentive to backers. Many creators that I have featured in my eBook have repeatedly said that running a Kickstarter is a part-time, if not a full-time job.

– You risk embarrassment if you fail. Personally, I don’t think this is a big deal. Repeated failure is part of the territory if you are trying to bring a cool project or product into the world. There are many creators I’ve spoken with that have failed the first time raising money on a crowdfunding platform, and then successfully relaunched their campaign.

Should you launch?

One of the things I really like about launching a crowdfunding project is that it forces you to get your ducks in a row and work on that passion project that has been at the back of your mind. If nothing else, it can be a way to involve your family and friends in what you are passionate about.

Still, I’d think long and hard about the downsides. Personally, I’ve found that certain project categories tend to do better than others on rewards-based crowdfunding sites like Kickstarter. For example,  I haven’t seen many software projects be successful. If you’d like to get my thoughts on whether or not your project is a good fit for this type of crowdfunding, leave a comment below!

GoFundMe/Fundrazr/YouCaring and other Personal Fundraising Sites

hand-506754_1280There are a lot of platforms out there that can help you if you want to raise money for a personal cause like medical, pet, or funeral expenses.

In my experience, the majority of individuals using these sites will see the most financial support from their friends, family, and local community. Although every now and again, someone’s story will go viral or attract PR attention, it’s definitely not the norm. Before launching a personal crowdfunding campaign, consider the following:

Pros

– You may receive donations during a time in need.

– Since more people are aware of your need or story, you have more of a chance to receive support from strangers than if you were to go it alone.

– A crowdfunding campaign gives you the chance to explain your mission, need, or story in both text, images, and videos. This page can function as a presentation or pitch that can easily be shared among your friends and family.

Cons

– You must step out on a limb and tell people about your need. You can’t expect strangers to just stumble upon your page and donate to your campaign. You need to actively promote it, which can be embarrassing for some people.

– It is unlikely that people far outside of your social network will donate to your campaign.

I think starting a personal fundraising campaign is a pretty big consideration for most people. It can be extremely humbling to ask other people for help. You may be met with backlash from family or friends who think that you should be solving your problems in another way. I would be crystal clear as to why you are raising funds and why others should support your project. It definitely helps if you’ve contributed to the local community over time in terms of work or improving other people’s lives.

NonProfit Crowdfunding Platforms

offering-427297_1280If you are a non-profit organization and want to start a crowdfunding campaign for a new initiative, there a variety of platforms you can choose from like Razoo, CauseVox, DepositAGift, and more. You could be an established organization with a repeat donor list, or a new org that is trying to build up a base of supporters. Either way, there are important points to review before going full-fledge into an online fundraising campaign.

Pros

– I think that more and more, nonprofits are seeing the huge potential for social media to spread a message across the world and gain new supporters. The Ice Bucket Challenge is a great example of this. When you start a specific project, it has the potential to reach new donors via existing donor’s social networks.

– Crowdfunding is a new and interesting way to engage supporters. Through updates, videos, and the comments section, you can make supporters feel like they are a partner in your organization

– The funding meter on most crowdfunding projects can help supporters visualize how close you are to your goal and what impact their pledge might have.

Cons

– If you fail to hit your fundraising goal, it may affect the moral of your teammates or backers.

– Both compliments and criticisms will be public in the comments section of your project, so you must take care to be attentive and respond to every social media mention or comment.

– You must pay a platform fee (typically 5%), which you would not have to pay if you were to host a fundraiser on your own website.

Conclusion

What type of crowdfunding campaign are you planning to launch? What do you want to raise money for? I’d also love to hear some of the pros and cons that I’ve left out via a comment below.

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  • Lucas

    I think one of the biggest cons is that people don’t realize that a crowdfunding campaign requires a lot if time to update, share, interact with donors, taking pictures, etc…

    • CrowdCrux

      Good point. It’s kind of like a full-time job.

  • Another con I’d add is that it can be a lot of stress too. Checking the website every few minutes, and sending out hundreds of e-mails sure doesn’t compare with a quiet day at the office.

    • CrowdCrux

      Good point. It can be an emotional roller-coaster in some ways.

  • Sandy

    Am hoping to launch my crowdfunding campaign end of this week on Indiegogo, https://www.indiegogo.com/individuals/10227040 I have a social business that hasn’t been doing well and am hoping to raise funds reinvest in the business rather than close it up. Its success will help me continue helping members of my community i.e. children struggling to find school fees and women who need help to grow their small business e.g selling roasted maize by roadside earn a living no matter how small to help feed their children. So rather than focus on just raising funds to reinvest in my social business, I hope to use some of those funds to help the underprivileged in my community, in Zambia, Africa. The perks funders will get are the handmade products women from my social business have been making. Am hoping to raise $15,000 and shipping costs as well as fees related to my campaign have been factored in the total. So what would you say about my chances of success? Thanks

    • CrowdCrux

      I think it comes down to connecting with donors or backers that care about the cause and offering interesting rewards to involve them in the initiative. I don’t know enough about the demographic you’re targeting to say about your chances regarding success.

  • Jessica

    Hi! I would like to start a campaign to fund my small business start up. Located in California; I have a dream to open a salon that is passionate about the beauty industry and being eco friendly. With the current drought I think the latter really hits home.
    I am hoping to offer hair services as the basis of reward for donation. What are your thoughts?

  • Alexandar Stamenic

    Hi.. Could you give me an advice as to whether to start a campaign on Indiegogo for a new type of heat exchanger / intercooler that can change the entire industry (Aumomotive, aerospace, motor, truck…etc)? My team headed by me has developed a completely new technology of cooling cores which is definitely the best (the ratio of manufacturing price-weight-efficiency-end price) in the world (we did our research + patent search in the global register), that has been confirmed. But we do not have enough funds to patent the technology, and at the same time we are also planning complete R & D process for which we need to get out to Indiegogo in order to complete it. What would be your best advice? Since I am in a really tough position, (just to be clear Provisional patents do not interest me because they do not cover our area properly and do not guarantee us security, also we had a lot of interested parties to invest and still have them, but they all demanded the participation of more than 80% in shares, which we can not accept)

  • Dana Hanson

    With a crowdfunding stage there are sizable pools of financial specialists that can be tapped. Having a pool of speculators that will in all likelihood transform into steadfast clients is extraordinarily valuable for new business people that might not have the association control immediately. It’s additionally useful for financial specialists since they can cooperate and work together on ventures that fit their speculation destinations with steady group association.

  • Samantha

    Hi, I was looking for your input on launching a cat product. We are looking to crowdfund to raise money to offset version 1 development/costs and to ultimately create version 2, 3, 4 and so on. We are working on a video, prototype is yet to be delivered, and manufacturing has started overseas. What are your thoughts on the crowdfunding site?

  • JEAN BERLING HARDY

    Hello,

    My ‘product’ is a concept for a community of Outsiders. The dilemma that all Outsiders face is that when they wish to reallze their passion they always have to pass through a gatekeeper, This gatekeeper is always a Player. By forming their own nodal network accross the world the Outsiders would be able to reach critical mass and avoid the gatekeepers altogether, This explainer video explains might help illustrate the point: https://www.youtube.com/watch?v=Y0TgPulwWAI

  • Lee Alexander

    Hi,
    I would like your thoughts if possible as I’m thinking of some sort of crowd funding, I have a passion for cooking and have been producing my own brand of chilli sauce for some years now and selling to friends and family, the Scoops Sizzling Chilee sauce brand is becoming very popular along with the easy foods that I cook (ribs, Panini’s, mango shredded chicken and so on) I also have a love for blues music. What I would like to do is open up “the Chilee Blues Bistro” serving the easy foods along with the sauces, this would be accompanied with local craft ales, rums & whiskey from around the world, it will be a chilled out ambiance, leather chesterfield arm chairs and sofas natural wood tables and bar with light blues music playing over head with the occasional live blues acoustic set on the weekends, opening times will be from 11am-11pm possibly to catch the lunchtime people then on into the evening, pretty much a great place to come and eat, drink and chat, whether it be a business meeting or a night out with friends and family. something that is lacking in the area where I live.
    I have already got my business plan 95% complete.
    Your thoughts would be greatly appreciated

  • Maureen L Teasdale

    I was hoping to read what the risks are in relation to say failing to meet a target. Do you lose what has been raised?