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Drawbacks of Crowdfunding for Your Business

FYL 8.18.16

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.

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