Crowdfunding—the process of getting startup, R&D or project-based capital from
people all over the internet—is pretty popular these days. With multiple sites, such
as Indiegogo, Kickstarter and GoFundMe, it’s very tempting for business owners and
entrepreneurs to turn to crowdfunding as a way to raise capital in order to enable
them to start their business, design a new product or introduce a new service.
But just because it’s easy to use a crowdfunding site to raise capital doesn’t mean
that’s what every entrepreneur should do. In fact, sometimes crowdfunding is a
really bad idea.
Why Crowdfunding Is So Popular and So Dangerous
The number-one reason crowdfunding has reached such heights of popularity is
that it removes the need to have a bank sign off on a loan. That means an
entrepreneur or business owner can get funding without any credit check or
business plan approval—which is not necessarily a good thing. Think about the
reasons why banks require a solid business plan. First, it helps them determine the
likelihood of a business owner being able to repay the loan. But second, it forces the
entrepreneur to really think through their plan, evaluate potential problems and
competitors, and create a solid strategy for marketing and dealing with various
adversities. Crowdfunding removes the requirement to have a business plan and
that may mean a lot of businesses aren’t as prepared to survive as they otherwise
would have been.
Another reason why crowdfunding can be a bad choice is that the results can be
misleading. Generally, the success or failure of a crowdfunding campaign is used to
determine market interest for a particular service or product. When you have a
successful campaign, one that was extremely well targeted, it could get your hopes
up much higher than they should be and convince you to take risks that aren’t in line
with actual market demand for your business. When you have an unsuccessful
campaign, it may look to angel investors and venture capitalists as if your product
has no chance in the market—even if the failed campaign was squarely due to
marketing and targeting mishaps.
Crowdfunding can be a valuable tool for an entrepreneur or business owner, but it’s
one that should be used judiciously after careful research and thought.