Crowdfunding is big and getting bigger. In the internet age, more and more businesses are turning to the web to generate business funding for their start up, while increasing numbers of wannabe investors go online to seek out accessible investment opportunities they couldn’t find elsewhere in a million years. It’s a great way to get involved in something new and it’s exciting for those looking to invest. It’s also a very accessible, hope-inspiring route to finance for entrepreneurs who are struggling to find funding from traditional sources.
Business funding options are diversifying. In a tricky financial time, investment for fledgling businesses, particularly from the banks, is extremely difficult to source. Alternatives including angel investment, business funding from providers like Everline and DIY ‘bootstrapping’ are all becoming more prevalent – yet it is crowdfunding which is receiving the lion’s share of the press – for good and for bad.
Industry commentators aren’t so sure that this form of financing is a brave new dawn. Yes, because entrepreneurs seek investment from a much bigger pool of potential investors, it can be easier for the right business to get the finance it needs. But, according to many, there are some fundamental flaws in the whole concept. In this post we’ll investigate these issues and try to determine whether or not crowdfunding is just a plain bad idea…
So, what’s the problem?
Accessible, yes, exciting, certainly – but there’s something to be said for less available, more traditional funding methods. Conventional investors know a thing or two about businesses that have potential. Start-ups who know their industry and who have a strong chance of success rarely need to go off the beaten track to find business funding. So what does that leave us with when it comes to crowdfunding? Effectively, it leaves us with investors who may not be especially savvy and businesses who have struggled to find investment elsewhere. Does that sound like a recipe for success, or does that sound like sloppy seconds?
Of course, not every crowdfunding situation will be like this – there are certainly plenty of success stories – but, as with most things on the internet, there’s an awful lot of quantity to be found and quality can seriously suffer as a result.
Even with the best business prospect, a huge number of conventionally funded start ups fail every year. These start ups will often have the backing and support of a clued-up investor who knows a thing or two about the market they have bought equity in. Crowdfunded businesses do not have this string to their bow – they’re more or less out on their own and without the expert guidance which can mean make or break.
Essentially, what this all means is that start-ups funded through crowdfunding platforms are more likely to fail - and those who invest are more likely to lose out too. Nobody wins.
What about the positives?
Yet the thrilling thing about crowdsourcing is the excitement. There is so much diversity on the web that the next start-up you encounter could be the next big thing. Investors don’t turn to these sites to make a sound investment – there are always Google shares for that after all – they’re there to be part of something new, fresh and exciting.
And the conclusion?
Crowdfunding is risky, yes. But with multiple investors, this risk is spread and the excitement is shared. It’s there for everyone and gives all start-ups a fair shot at success whether or not they’re a white male with family connections.
In effect, it’s a jungle out there and only the fittest will survive. It’s possible that there are a lower proportion of ‘fit’ businesses to be found on these sites, but there are plenty of diamonds in the rough which deserve investment and, with a little bit of luck, could really shine – and who doesn’t love a rags to riches story?