BY DAVID NILSSEN
Why I Think the Hype About Crowdfunding Is Too Good to Be True
Crowdfunding in one form or another has been around for years but has become a sexy buzzword of late. The majority of news articles about it are positive, to the point where many seem to view crowdfunding as a cure-all for small-business funding woes. But this hype has clouded a number of pitfalls both entrepreneurial hopefuls and prospective investors need to be made aware of before jumping on board.
Crowdfunding has little application to business unless an entrepreneur only needs a small amount of money to get started. For projects requiring $5,000 or less, for example, it may be the right route. But for anything larger — especially where the total investment is in the tens of thousands or greater – it usually won’t suffice. Small amounts of capital can certainly help start a business initially but most will need to be recapitalized. Unfortunately, subsequent capital is not as easy to secure as some would assert.
That means that many of these “crowdfunded” businesses are often severely undercapitalized and that could translate to dramatically lower success rates. Some reports show crowdfunded businesses fail at a higher rate than other small businesses. As more crowdfunded businesses fail, fewer entrepreneurs will trust its model and regulations may be implemented. Companies requiring large amounts of capital will likely continue to seek traditional funding or forms of alternative funding.
Related: Take a Step Back. Set a Realistic Goal for Your Crowdfunding Campaign.