Is Crowdfunding the future of raising business finance?
Using crowdfunding as a method of raising business finance is becoming more and more popular. According to the Huffington Post 0.89billion was raised through crowdfunding in 2010, this became 2.66 billion in 2012 and is predicted to be about 5.1 billion for this year, 2013. Of course not all of this is for startup ideas but you get the trend none the less. It is clear that there are many positives to crowdfunding, otherwise it wouldn’t be growing at such an impressive rate, however will it end up replacing more traditional methods of raising finance? I doubt it as there will always be banks and business angels. However that is not to say crowdfunding won’t keep on growing, this I feel is for a number of reasons.
Firstly crowdfunding can help people who are either young, have a bad credit rating or for whatever reason simply cannot get a bank loan. It gives these people a great opportunity to raise £10,000-£20,000 even if your contacts are a bit thin on the ground. If you know a lot of people you can raise upwards of £50,000.
Another advantage is how much exposure your company will get before you have even launched it. Say you want to launch a new soft drink. Breaking into this market is notoriously difficult, but not impossible if the situation is right. You will need every bit of advertisement you can get. Remember your backers want you to succeed and they believe you can, otherwise they wouldn’t have invested in the first place. They will talk to their friends and family and word will spread. This is point is often missed when people weight up weather to raise business finance through crowdfunding.
However crowdfunding does have a few drawbacks which will limit its capability to becoming the main method of sourcing business finance for your startup ideas.
In a way the first strength of crowdfunding that I outlined could in fact become a weakness. With more and more potential startup ideas competition will become very fierce and unfortunately it’s very hard to fight the competition as it’s down the website you use where you will be listed and how much coverage you will get. If you go on kickstarter right now I can guarantee you that there are a lot of very poor ideas requesting finance. Investors will get tired of having to trawl trough spam so will find something else to do with their time and this could potentially see the bubble burst.
A server handicap of crowdfunding is that you will miss the advice of a bank manager who has been there and done it. You will not get such good feedback from investors who simply see an idea the like and click to donate 5 or 10 pounds. A bank manager or business angle would see holes in your business plan straight away and force you to come up with solutions, as a result your businesses future would be more promising than if you used lots of individual investors.
Clearly there are limitations on crowdfunding and weather it keeps on becoming more popular is hard to tell but I would guess not, in my opinion this will be due to spam and rubbish ideas. So if you need finance for a startup idea I would get it now before the bubble bursts.
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