The Pros and Cons of Crowdfunding for Business by Zack Miller

TL;DR - Pros and cons of rewards-based crowdfunding and equity crowdfunding

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Tags - crowdfunding, pros and cons of crowdfunding, initial capital, financing, startups, investment, rewards-based crowdfunding, equity crowdfunding

Questions answered:

  • What are the advantages and disadvantages of rewards-based crowdfunding?
  • What are the advantages and disadvantages of equity crowdfunding?

Summary:

  • Pros of rewards-based crowdfunding:
    • Access to “cheap money”: rewards-based crowdfunding allows founders to raise money for their startups without selling off any equity stake.
    • Pre-funding the next product: rewards-based crowdfunding can be a great way for founders to lay the groundwork for their next innovative projects; once founders build a network of enthusiastic supporters and gain their trust, they will be eager to get involved in the future as well.
  • Cons of rewards-based crowdfunding:
    • Pressure: once founders have successfully raised funds, they must ship their products/services and deliver rewards to supporters on time, which is challenging.
    • Possibility of wasting time and energy: due to the binary nature of some crowdfunding campaigns (where founders get nothing if they don’t hit their target amount), founders can end up wasting time and energy if their campaigns fail.
  • Pros of equity crowdfunding:
    • Smart money: there are very accomplished investors using crowdfunding platforms whose contribution can add to the success of startups in the long term.
    • Potentially larger sums of fundraising
    • Easier investor relations: instead of raising funds from numerous investors, some equity crowdfunding platforms pool the funds raised into a single investment, making one point of contact for reporting requirements.
  • Cons of equity crowdfunding:
    • Increased transparency: not all founders are comfortable disclosing their financials and business plans online for investors to see, which is usually necessary for equity crowdfunding.
    • “Expensive” fundraising: founders are required to give up some control of their businesses to investors (equity owners).

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