The concept of equity crowdfunding, or even Kickstarter-type rewards-based funding, may sound like an ideal solution to your financing needs. Create an appealing marketing video, conjure up some statistics, and watch the money come flowing in. But alas, nothing worthwhile is that simple. So, before deciding whether equity crowdfunding is right for your startup, take a look at these pros and cons.
Pros:
1) Attract people who believe in your mission
The majority of people who choose to invest in your startup through equity crowdfunding will be passionate about the same things that get you out of bed in the morning. These like-minded investors can then act as both formal and informal advisors, helping you determine the best direction for the company as it grows and scales.
2) Receive free marketing
Because your shareholders are on board with your mission, they are also likely to be your most enthusiastic promoters. Not only will they become part of your customer base, but they will also be inclined to act as informal ambassadors for your brand by referring the business to their friends, families, and social networks.
3) Skirt getting a business loan
If your startup already has cash flow but isn’t bringing in enough to expand operations, you may be considering a business loan. However, a successful equity crowdfunding campaign could allow you to forego this step and alleviate the stress of having to make monthly loan payments.
4) Remain the top decision-maker
With a private equity investor, such as a venture capitalist or an angel investor, you may lose the ability to continue calling all the shots throughout the growth of your company. If an individual or company fronts a large sum of cash, they’re likely to demand a say in every major decision affecting the bottom line. With equity crowdfunding, although you will have shareholders, you’re far more likely to retain control of these decisions.
Cons:
1) You will no longer be the sole owner of the company
As referenced above, with equity crowdfunding, your shareholders each own a small portion of the company. Although there won’t be a VC heavily influencing every move, if full ownership is something you’re set on, crowdfunding is not for you.
2) Convincing people to hand over money for your vision isn’t easy
Getting someone to believe in your mission is the easy part. The real challenge is convincing them to tangibly participate in that vision. The psychology of handing over hard-earned cash with absolutely no guarantee of return on investment can feel risky and downright reckless to many. While these fears can be quelled through a transparent and well-crafted campaign, the process can be more difficult than you may anticipate.
3) Keeping shareholders engaged is hard work
If you succeed in persuading people to invest in your startup, don’t expect them to then quietly disappear. Keeping your shareholders engaged so they continue to champion your business requires regular communication. Updating investors on the company’s progress and fueling excitement about the future is a great way to stay top of mind and keep the door open for soliciting further investments down the road.
4) Making money costs money
Just like any other business, equity crowdfunding platforms have operational costs, and they typically cover those expenses by charging their clients a fee. This could be in the form of commissions, administrative costs, and transaction fees, to name a few. Additionally, since equity crowdfunding is regulated in most countries, you will also incur legal fees. Before deciding whether equity crowdfunding is a viable option for your startup, make sure to work up a cost-benefit analysis. Doing the work only to barely break even can be a significant waste of your time and energy.
Equity crowdfunding is not the perfect solution for all startups. However, it can create opportunities for businesses that may not fit into more traditional models of raising funds. Now that you have a better idea of the advantages and disadvantages of equity crowdfunding, take some time to think these points through before making an informed decision for your startup.
Have any additional points you’d like to mention? We’d love to hear them! Leave a comment below.
