The Pros and Cons of CrowdfundingPublished on 17th April 2018 - Last update on 8th January 2019
If you run a startup or a developing SME, raising the funds that you need to achieve your short and long-term goals can be more difficult if you’ve got a limited trading history. That’s why a growing number of aspiring UK entrepreneurs are choosing to explore how Crowdfunding can help. Although this can be a useful way of raising funds on the back of external investors during the early stages of your business, it may not always be the most suitable solution available. That’s why, before deciding on Crowdfunding, you need to make sure that you’re fully informed about what this type funding may mean for your business. So to help shine some light on the subject, here are some of the pros and cons of heading down the Crowdfunding route.
- Engages consumers and raises awareness
- Requires an accurate company valuation
- Platform handles administration for you
How does Crowdfunding engage consumers and raise awareness?
One reason why Crowdfunding can be a useful tool for your business is that it puts you in a stronger position to engage consumers and raise awareness of your goods and services. This is because Crowdfunding is run through an online platform that allows you to appeal directly to investors, helping you to stimulate interest in the viability of your goods and services and promote it. So, regardless of whether you receive the funds that you need or not, Crowdfunding platforms are still a useful means of showcasing the benefits of what your business has to offer.
How demanding is the Crowdfunding process?
Convincing investors to provide funds for your business isn’t easy and will certainly consume a lot of your time. So, before embarking on this route, you need to work out how much time you’re willing to allocate each day in order to form a successful crowdfunding campaign. That said, Crowdfunding can sometimes prove a more efficient means of funding than approaching an angel investor. Nevertheless, for the campaign to be successful you will need to:
- Create videos and other written promotional materials upfront, so that the effort you’ve invested into the campaign is apparent to investors from the start.
- Sometimes, in order to be successful in attracting investors, you need interest in your business’ goods and services from potential early adopters before the campaign goes live. If you already have a number of people interested in what you have to offer, an investor may feel more inclined to see what you’re all about. As such, you may need to spend some time and money running an early campaign and identifying anyone who might be interested in what your business has to offer. This is why Crowdfunding can be very hit and miss.
What are investors looking for?
If you are going to run a Crowdfunding campaign, you need to be realistic about your business’ potential. Before you do anything, get your figures together and make sure that they stand up to intense scrutiny. Although overstating the true value of your business using tax relief and government incentives can occasionally attract investors, if you aren’t able to back your claims up, it may end up driving interest away. So, if you are going to run a Crowdfunding campaign, you need to be aware that:
- Investors are aware that some business owners use such techniques in their campaigns to make themselves more appealing to investors. However, this can have the opposite effect, especially if you’re unable to provide reasonable grounds for the valuation of your business. In fact, a number of platforms are now advising entrepreneurs to think more carefully and be realistic about how much their businesses are worth.
- Although it may seem a good idea, presenting a realistic valuation of your business might cause investors to believe that you’re currently holding back equity. Should investors request another valuation later in the campaign, the figures you present might be less flattering or show a less than expected increase in the value of your business. As a result, investors might interpret this as your business having a lack of momentum, causing them to take their money elsewhere.
How is administration handled?
One benefit of Crowdfunding is that the platform handles much of the administrative duties on your behalf, such as the paperwork required for the initial investment. This can prove useful as you’ll regularly need to report back to any potential investors, with some being more demanding than others. Nevertheless, because of how these platforms operate, you’re able to communicate with them all at once, making the process less arduous.
Still thinking about applying for Crowdfunding?
Although Crowdfunding is a useful tool for many UK startups and SMEs, there are plenty of other funding opportunities available as well. If you’re not keen on giving away equity in your business to 3rd party investors or you’re finding it too difficult to raise the amounts you need, you might want to apply for an alternative instead. The means to achieve your goals could be closer than you think, all you need to do is source an appropriate solution. However, with so many different products to choose from, how can you tell a product is suitable for your business’ needs?
At Rangewell, we’re an Access to Finance specialist working with over 300 lenders to offer you an overview of more than 23,000 business finance products. Our services are free to use and we’ll also guide through the application process. We’re with you every step of the way. So if you’re looking for a suitable alternative to Crowdfunding, apply today or find out more with Rangewell.
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