Should Entrepreneurs Seek Crowdfunding?

A lot of entrepreneurs in todays landscape must decide whether or not to go the crowdfunding route. If you ask multi-billionaire Richard Branson, you’re probably best off at least considering it...
Should Entrepreneurs Seek Crowdfunding?
Written by Chris Crum
  • A lot of entrepreneurs in todays landscape must decide whether or not to go the crowdfunding route. If you ask multi-billionaire Richard Branson, you’re probably best off at least considering it.

    Branson has been an investor in popular crowdfunding platform Indiegogo, and in the UK, his Virgin StartUp has partnered with Crowdfunder to help entrepreneurs raise money for their projects.

    Branson participated in a panel discussing the topic in Chicago, which you can view below if you have an hour to kill.

    He also wrote a blog post about how crowdfunding “could change the world”.

    “The benefits of crowdfunding go way beyond the money,” he writes. “It brings market validation, access to new investors, promotion, community exposure, and real-time feedback. As well as the funds to start your business, it provides real connection with people who care about your business.”

    “There are lots of wonderful ideas that are now getting the exposure they need to secure bigger investments, which is tremendous for the new generation of entrepreneurs,” Branson says in the post. “Like most things in life, crowdfunding success is much more related to how willing you are to pour yourself into the project with your heart and soul. You’ve got to have a great product, and then you’ve got to stand out from the crowd.”

    You don’t have to look very hard to find champions of crowdfunding, but there are plenty of naysayers as well. It’s also not that simple. There are reasons why crowdfunding might work well for one business and not for another.

    According to Biz2Credit CEO, writing for Fox Business, reasons to avoid crowdfunding include: it works best for projects that require small amounts of capital; lack of prestige; negative impact on future financing options; limited value of shares sold to investors; speed; and potential lawsuits.

    “Kickstarter isn’t kickstarting businesses so much as it’s kickstarting relationships based on debt,” wrote David Banks at The Society Pages.

    “Statistical analysis by Professor Mollick of Wharton uncovered that 75% of all funded projects on Kickstarter shipped late,” wrote Version One founding partner and Andreessen Horowitz board partner Boris Wertz last year. “When consumers start to look at a crowdfunding site as the equivalent of an online store where they can buy new toys, there will be trouble (hence the Kickstarter blog post: “Kickstarter is not a store”). Delays in production/delivery are usually expected among investors, but even a few weeks delay can frustrate and anger this new class of ‘investor customers’ who are expecting the same smooth process as when they order something from Amazon. Their frustration ripples throughout the web, souring the entire industry.”

    A recent article from Shelly Banjo at Quartz says that while “once idealistic,’ Crowdfunding is “now an unholy hybrid of retail, investment, and risk.” Either way, it’s only growing more and more rapidly. Banjo shares this chart tracking its growth over the past few years:

    The Wall Street Journal appears to not only condone crowdfunding for small businesses, but encourages them to “go back for seconds”. It looks at data from Kickstarter showing that those that have already had a successfully funded project have nearly double the chance of success of reaching their next funding goal.

    Despite all the media coverage of crowdfunded projects and crowdfunding in general, small businesses have still been slow to embrace it, according to Forbes, which says it makes up just a “tiny fraction” of business loans.

    Images via Twitter, Quartz

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