Crowdfunding has been present for ages the only thing that has changed is the way of raising the funds from the crowd. In the past, people use to raise funds from their relatives and friends for doing business or any task whereas in the present day people raise funds from all over the world from unknown people to kick start their business or doing any particular task. Crowdfunding as the name suggests refers to that practice using which an individual raises funds from a large number of people. Crowdfunding is of four types which are reward-based, donation-based, equity-based, and debt-based. In order to understand it better let’s look at some of the advantages and disadvantages of crowdfunding –
Advantages of Crowdfunding
Easy Way of Raising Funds
The first and foremost advantage of crowdfunding is that it is the easy and cheap way of raising funds for your project because if one adopts donation-based crowdfunding then there is no cost involved and in the case of debt crowdfunding also it is cheaper than taking a bank loan or taking finance from loan companies.
Promotes All Projects
Another benefit of crowdfunding is that sometimes banks or financial institutions do not give loans for some projects due to their strict guidelines and that is where crowdfunding can be a boon for the proprietor as many interesting projects remain on paper only due to non-availability of funds but crowdfunding ensures that creative ideas turn into a profitable business.
Free Marketing Campaign
Another benefit of crowdfunding is that helps the company in creating awareness about the product and also a free marketing campaign because a successful crowdfunding project can ensure that company is able to generate enough headlines so as to make consumers curious about the product which it will be offering which in turn can lead to successful launch and acceptance of the product by the consumers.
Disadvantages of Crowdfunding
Low Sucess Ratio
The biggest disadvantage of crowdfunding is that out of 100 projects only 1 or 2 projects get funds from the public successfully which makes the success ratio of crowdfunding very low and hence any company thinking of going to crowdfunding route should keep in mind the low success ratio as it can be demoralizing for the company because of the effort put to raise funds via crowdfunding are huge and it can go in vain.
Cat is Out of the Bag
Another limitation of crowdfunding is that since it involves revealing your idea on the internet and in the public domain so as to get the funds there is this risk that someone else can steal or copy the idea and start a business before you get the funds and hence protecting the idea though patent or trademark is the logical way of avoiding such situations.
Complacency
Another disadvantage is that since the company or individual has got the funds for free there is this human tendency to take the funds received through crowdfunding for granted anything which we get free and the individual may not do hard work to take the company to new heights which would have been the case if his or her own funds were invested. In simple words, if students are assured that they will not fail in exams then chances are that majority of students will not prepare for the exam that well as they are complacent about the results of the exam the same thing applies to the entrepreneur as free funds can make them complacent about the funds as well as their business.
As one can see from the above that crowdfunding has both benefits, as well as limitations, and any company thinking of raising funds through crowdfunding, should carefully analyze the above points and then only should take the decision whether to go for crowdfunding or not.