The Pros and Cons of Crowdfunding: Is It a Good Fit for your Product?

We’ve talked about crowdfunding before at 13p5, and what it takes to run a successful crowdfunded campaign, but we haven’t really broken down whether this funding option is right for you and your vision.

Crowdfunding has exploded in popularity in recent years with websites establishing themselves as easy means to get your own campaign out there for the world to see. However, the fact of the matter is that crowdfunding isn’t for every product. So let’s take a close look at crowdfunding, the pros, the cons, and whether or not it’s worth your time and consideration.  

So, a brief overview. Crowdfunding relies on “modest contributions from a large group of individuals” rather than the typical large contribution from a few of venture capital funding.

Depending on the form and function of the crowdfunding project, these contributions may simply be donations or consumers may be making a small investment in the delivery of a future product that they find interesting or compelling.

Crowdfunding is typically a good fit for new Business-to-Consumer (B2C) companies that are hoping to deliver a product that has a broad enough appeal to drum up interest before it’s even made. Artists, designers, and inventors are generally a good fit for crowdfunding.

Crowdfunding can seem like an appealing option for businesses that have failed to secure venture funding in the past, but it can be filled with many of the same challenges. Less than a third of crowdfunding campaigns actually hit their goals, and a lot of that has to do with the fact that people just aren’t interested enough in a product to support it before they can actually get it in their hands.

Even if you’re confident that you have the kind of B2C product to generate excitement, there are a few steps to take to make certain that this option is the right one. Jayson Demers wrote recently for Entrepreneur about the 7 questions to ask yourself before committing to a crowdfunding campaign.

First and foremost among his questions are whether or not you have a clear plan and financial goal. As many big crowdfunding efforts have failed, potential contributors have naturally become wary of the projects they choose to support. It’s not only important that you have a clear plan of action with all the ways you intend to use the money you’ve been given, but that you’re prepared to share a lot of that information with your contributors from the start of any project.

The best crowdfunding campaigns update their contributors constantly on progress made, engage with them by way of videos and teases, and make promises of various deliverables adjacent to the product itself. Many campaigns start with a clear explanation of what you want to achieve and how you are going to do it from the start, usually in video form.

The contributor needs to know from the start that they are going to get something worth paying for in advance. If you can successfully answer their question of “why should I care” only then should you consider crowdfunding a worthwhile pursuit.

Keep all this in mind because the truth is that crowdfunding is hard. It can require a ton of consistent engagement with contributors, and it’s loaded with the same demands and expectations as other funding avenues, arguably even more so. You may even be expected to develop outside your original parameters with things like stretch goals and incentives. As if developing a product on its own wasn’t enough work, all these things will get piled onto your plate too.

And there’s risk too. Many see crowdfunding as a low-risk, high-reward proposition, but this really isn’t true. Many of the biggest crowdfunding sites (Kickstarter and IndieGoGo) have protections in place to recoup contributions for failed products.

Even if you don’t run up against those fail safes, it can be permanently damaging to PR if you deliver a product below expectations. Only approach this option if you have absolute confidence in the thing you’re promising, and you and your team’s ability to enact it in a reasonable amount of time. It probably won’t work out otherwise.

Consider crowdfunding as seriously as you would any other funding option, make sure it suits your product, and craft a great campaign. That’s the best way to ensure that it works out well for you.

— ZK

Ed Lynes13p5Comment