Crowdfunding Best Practices

A No-Holds-Barred Take on the Pros and Cons of Crowdfunding

Crowdfunding has become a valuable & viable way for businesses to raise capital. Evaluate the positives & negatives of crowdfunding with this helpful guide.
A No-Holds-Barred Take on the Pros and Cons of Crowdfunding
Gayatri Bhaumik

By Gayatri Bhaumik

 

April 10, 2020

Crowdfunding has become a valuable and viable way for businesses to raise capital. The low cost of entry and unlimited access to various crowdfunding platforms has paved the way for this, with aspiring entrepreneurs looking to fund their ideas into reality opting for this method as a low-risk means of getting capital. While there are certainly pros and cons of crowdfunding, this method of raising capital continues to increase in popularity for many reasons.

It may seem easy to simply sign up to a platform, list your needs, and raise money, but crowdfunding requires a sound implementation strategy and careful execution to be successful. It’s prudent to evaluate the positives and negatives of crowdfunding before jumping into the fray.

What Are the Benefits of Crowdfunding?

Crowdfunding, whether you choose an equity or rewards-based model, is undoubtedly an excellent resource for any entrepreneur. Below are the benefits of choosing crowdfunding over traditional financing methods, such as banks and venture capitalism.

  1. Reduced financial risks: Crowdfunding enables small businesses to test the viability of their business ideas before making huge investments. With crowdfunding, you can test the market and get some feedback before spending heavily.
  2. Validates business idea: A successful campaign provides social proof for your business idea. It eliminates any doubts by proving that there is a demand for your products and services.
  3. Creates business momentum: Small businesses need momentum to grow. As more people get to know your business, you can be sure of building momentum before even starting operations.
  4. Raises a lot of money: Crowdfunding can raise enough capital to kickstart your venture.
  5. More than financial support: Sharing your idea attracts not only funding but also expert guidance and feedback on how to better your ideas.
  6. Brand promotion: Investors will continually track the progress of your business, unconsciously promoting your brand in their networks.

4 Disadvantages of Crowdfunding

Some of the negative aspects of crowdfunding include:

  1. Takes a lot of time and effort: Successful campaigns require a lot of personal devotion, in terms of time, effort, and money. You will spend a lot of time and money creating prototypes, convincing videos, and persuasive content to sell your idea.
  2. Possibility of failure: The sad reality is that only a fraction of crowdfunding campaigns meet their desired goals. If you fail, you may have to deal with bad publicity and embarrassment.
  3. Theft of idea: Unless your crowdfunding idea is patented and you have all the copyrights and trademarks in place, someone could steal it. Some individuals could steal your idea and build a better version (or just market it more successfully).
  4. It does not suit all business ideas: Crowdfunding can work for entrepreneurs looking to start consumer-facing products - such as bags or designer shoes - but does not favor, for example, painting, salon, or catering businesses.

Is Crowdfunding Good for Investors?

With crowdfunding, startups and companies get backers and funds to fund their ideas without interference from banks and venture funds. These investment opportunities excite investors because they have the potential to offer higher returns compared to other, riskier forms of investments. Apart from the monetary benefits, crowdfunding provides many more advantages than drawbacks for investors.

Benefits of Crowdfunding for Investors

  • Safe: Investors are always searching for opportunities with big benefits and low risks. As such, investors find this option a good choice, considering it is an independent sector that is not linked to other financial markets. It remains stable even during times of economic instability.
  • Diversified investment portfolio: Investors can back many campaigns to diversify their “investment portfolio.”
  • Tax-free: Crowdfunding decreases the investor’s tax burden as they don’t have to pay tax on these “investments.”
  • Multiple investment opportunities: No matter the amount of money you have, there is always an investment opportunity. Most crowdfunding platforms set low minimum thresholds to make them accessible for everyone.

Disadvantages of Crowdfunding for Investors

  • Lack of control: Investors lack direct control over the business.
  • Business risk: As with other investment opportunities, there’s always a risk of losing your investment - albeit a lower one.

What are the Benefits for Nonprofits?

Nonprofits play a crucial role in society, filling the space which the public and private sectors ignore. Crowdfunding comes in handy for nonprofits in the following ways:

  • Creates a bandwagon effect for getting people to invest
  • Cost-effective strategy
  • Provides validation
  • Campaigns can go viral quite easily

Similarly, crowdfunding for nonprofits comes with several drawbacks. Among them:

  • Possible scrutiny and rejection
  • Risks of failure
  • High fees
Hands holding notes for Crowdfunding

Are Costs a Factor?

Despite the wide-ranging potential of crowdfunding, platform fees, coupled with gateway fees, can take a toll on aspiring businesses. It's certainly a consideration when talking about the pros and cons of crowdfunding. However, as the old adage goes, you have to spend money to make money, and you should remember this when kickstarting your campaign. Some of the costs involved in crowdfunding include:

  • Platform fees: This applies if you decide to host the campaign on an external platform, such as Indiegogo or Kickstarter. These third-party platforms usually charge around 5% of the total funds raised. You can opt for self-hosted crowdfunding to keep 100% of the funds you raise. However, you will still have to pay a one-time fee between $80 and $150 to host the campaign on a WordPress site.
  • Payment gateway and processing fees: These are fees charged by payment platforms for authorizing, facilitating, and protecting the transfer of payments.
  • Website development fees: Even if you use a third-party crowdfunding platform, you will probably have to create your own site to allow people to find out more about your brand and products. You can save some money by developing the website on your own, but if you don’t have the necessary expertise, you may have to hire a developer. You’ll also need to factor in website costs such as domain registration, web-hosting, plugins, and SSL certificates.
  • Content production fees: You need a budget for video and copywriting production.
  • Marketing fees: To ensure a successful campaign, you will need a good marketing budget. This should cover ads on social platforms like Facebook and Instagram, and pay-per-click investments on Google Ads, for example.
  • Fulfillment costs: Many crowdfunders forget to factor the cost of fulfilling their campaign into their initial planning. But, this can be a make-or-break factor for a campaign. Imagine running a successful campaign but then running out of cash to send your orders to backers!

At Easyship, we have a lot of expertise with fulfilling successful crowdfunding campaigns and can offer plenty of advice on how to plan ahead for this. We’re also the exclusive shipping partner for Indiegogo and can work with any platform. Plus, you can sign up for an account for free; you won’t be charged to use the platform if you send less than 500 shipments a month, and you’ll always have access to the most affordable shipping solutions.

Simply put, the costs of crowdfunding are important to consider before launching any campaign. The costs vary depending on how you will run your campaign; you need to plan well to ensure you have enough money  to cover them.

How Successful is Crowdfunding?

The surge in crowdfunding in recent years is a clear indicator that it’s possible to find success with a campaign, and this certainly weighs in the debate about the pros and cons of crowdfunding . However, not all campaigns are created equal, and therefore, not all of them are guaranteed success. As mentioned, a solid strategy and execution plan is vital for a successful campaign.

Successful Danish crowdfunding project: MATE eBike

How to Run a Successful Crowdfunding Campaign

Projects funded through crowdfunding are wide-ranging. For quite some time, startups were the primary focus of these campaigns. Others have achieved funding for personal needs, including the payment of funeral, medical, and school expenses. Needless to say, not all of these campaigns have been able to meet their goals and raise the required amounts of money. Before you start crowdfunding, consider the following:

  • Conduct in-depth research
  • Identify the right platform for your campaign (they should have the right target audience)
  • Provide detailed information about your campaign and plans, and justify why people should be interested in backing it
  • Make the rewards worthwhile
  • Communicate openly,  accept feedback, and follow through on promises

5 Successful Crowdfunding Campaigns You Should Know About

Some of the most successful crowdfunding campaigns in recent years include:

  • Tropicfeel: This Easyship client aimed to sell 10,000 pairs of their sustainable, travel-friendly shoes in their first campaign. Instead, they reached 25,000 backers and sold more than 32,000 shoes in 142 countries.
  • MateBike: This Copenhagen-based company crowdfunded its unique eBike and raised over $24 million in two campaigns (they’re an Easyship client, too!)
  • The Everyday Messenger: Billed as the most successful bag in crowdfunding, this highly-functional messenger bag became one of Kickstarter’s most successful campaigns.
  • Waverly Labs: These tech innovators created Pilot, an in-ear, real-time translation wearable that pairs with your smartphone. Just 15 minutes after launching their campaign, they’d hit their funding goal; within two hours, they had $1 million; the final tally was a cool $5 million of funding. And yes, they’re an Easyship client, too!
  • Exploding Kittens:  Who would’ve thought a $20 card game would become one of the most successful crowdfunding campaigns in history? They raised more than $8.7 million from over 219,000 backers and have sold over eight million games across the world.

To Crowdfund or Not, that is the Question

Apart from being an easy way to finance your idea, crowdfunding is a surefire way of identifying whether your customers believe in your business idea. Arguably, the best feature of crowdfunding is that anybody can do it. The important thing is to understand the pros and cons of crowdfunding. If you’re thinking about this approach for your business or venture, make sure that you create an appropriate goal, do your due diligence, choose a good platform, and provide constant updates. Don’t forget to identify the associated costs and budget for them.

If you’re looking for success with your crowdfunding campaign, Easyship can help you reach your goals by offering solid fulfillment support. As well as being highly experienced in crowdfunding, the platform offers you the ability to automate your shipping process, from labeling and customs forms to tracking and insurance. Sign up for a free account now to see how we can help you reach your crowdfunding goals!