Is Crowdfunding Always A Good Thing?
With the increasing popularity of sites like Kickstarter, GoFundMe, Indiegogo, and others like them, crowdfunding is becoming a viable way of raising capital to pay for the development of a new product, a creative endeavour, or just about anything else.
Adding It Up
The crowdfunding market is on the rise, too; in 2013 alone, the international crowdfunding industry was worth over $5 billion USD.
For many startups, crowdfunding has been a viable way to get consumers excited about a developing product, allow those consumers to have an early stake, and raise a tidy sum of cash to pay for initial costs, all at the same time.
At first glance, crowdfunding may appear to be the answer to every startup’s dreams. But of course, like all seemingly good things, it has its drawbacks. Here are some pros and cons of this relatively new fundraising phenomenon.
A huge benefit of crowdfunding is that companies know right away if there is consumer interest in a product; they won’t spend billions to develop a product that no one is excited about. Similarly, it allows consumers to have more of a direct say in bringing to market a product they truly want. For startups, it’s a new source of capital that doesn’t depend on face-to-face selling. Rather than pitching to venture capitalists and having an enormous amount of funding riding on one high-stakes meeting, crowdfunding takes an everyone-pitches-in approach. Finally, a good crowdfunding page can help to build a lot of buzz about a product well before it’s even available.
Crowdfunding can force a lot of companies to take a market-first-develop-later mentality; it essentially takes a good idea and turns it first into a PR pitch. Instead of developing their product, companies try to sell something that doesn’t even exist yet.
Plus, as you may have noticed, there’s quite a lot of noise in the crowdfunding arena, with so many products and projects competing for consumers’ attention. This leads to a seemingly contradictory outcome. First, a lot of products get funded, leading to lots of new gadgets competing for market share. But then, lots of projects don’t get funded — there are so many companies that want support, and consumers simply cannot support all of them. It’s an early letdown for some companies who may feel like they were unfairly shunned or that consumers just didn’t “get it.”
Crowdfunding is definitely at the frontier of market-based fundraising. While there have been several success stories in the past year or two, it will be interesting to see if consumers are willing to allow startups to continue with this method of getting money for product development or force them to revert to earlier methods of raising capital.