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Funding is one of the biggest constraints in running a business. In fact, lack of funds is the number one reason why most businesses fail. In this article, we talk about the power of crowdfunding to run a business. As the name explains, crowdfunding is about asking money from people to develop a business. It prevents you from going to specific investors and instead create an opportunity to put your idea out in the public domain.

However, crowdfunding is not as easy as it sounds. It requires dedicated effort and perhaps more time than the traditional fundraising route for entrepreneurs to develop a business this way.

What is Crowdfunding?

As the name indicates, crowdfunding is about asking the public for money. It is different from donations because you’re getting something in return. For an entrepreneur, asking money from the crowd is attractive because it not only creates an opportunity to raise funds but also gets the word out there about your business idea. i.e you are already marketing your business and potentially also gain some early customers as well.

Crowdfunding usually works well for B2C projects where you have a direct interaction with the customer. The problems these businesses try to solve are easily understandable and affect the customers directly. I’d still consider the traditional fundraising routes for a B2B business. Related: Difference between B2B and B2C

Types of Crowdfunding

1. Reward-Based: Backers receive a reward, typically the product you plan to create.
2. Equity-Based: Backers receive shares in your company.
3. Donation-Based: Used mainly for charitable causes.
4. Debt-Based or P2P Lending: Money is lent to the project owner in return for interest payments.

Pros and Cons of Crowdfunding

You will face risks in everything as a new business and this is nothing different. A crowdfunding exercise puts your idea in front of the world. It even generates interest and great marketing for your idea. However, we have seen numerous business ideas promise big things but fail. It is hard to maintain that balance between overpromising and appearing too modest.

You can’t take the customer for a ride or cheat them because the word gets out and you will risk everything including your own reputation and integrity. Make sure that you are promising only what you think you can deliver. A few bullet points on the risks and opportunities in crowdfunding are below.

Pros:

• Quick capital generation
• Market validation
• No collateral needed
• Publicity

Cons:

• Platform fees
• Time-consuming
• Risk of failure