Crowdfunding is a financial and marketing tool that represents a highly challenging and significant activity in the life of a company, so inevitably it can have pros and cons. These depend largely, rather than on the tool itself, on how it is used, the awareness of those who use it, and the type of company involved.
Knowing the pros and cons of crowdfunding is useful to get a clearer idea of what it means to do crowdfunding, to understand whether it is suitable for your needs, and to begin this experience prepared to avoid common mistakes.
Crowdfunding: the advantages
The pros of crowdfunding stem mainly from its wide accessibility and marketing potential. Let's delve into them one by one.
- Anyone can do crowdfunding (or almost anyone): it is an extremely flexible tool that can be adapted to different needs, starting and ending points. Startups, SMEs, mature businesses can all do crowdfunding, in different ways.
- It turns out to be much more accessible than the banking channel as a financial tool: it is more democratic and more meritocratic, and it increases the chances of growth for small and medium-sized enterprises, which represent the fabric of Italy's entrepreneurial landscape.
- It is a faster transaction than applying for a bank loan or financing through professional investors such as business angels and funds.
- It is a megaphone: it allows you to reach a multitude of people who would not be reachable in other ways (or would be much more difficult).
- As a result, it is a powerful marketing tool: doing a crowdfunding campaign means getting the word out not just about a project, but about the brand as a whole, on many channels at once, with an additional online storefront to the company's website, and with unique, limited-time offers to propose.
- It increases competitiveness: hardly two competing companies are doing a crowdfunding campaign at the same time, so you get a free field where you can propose yourself with more visibility and through which to be distinctive.
- The different types (equity, lending, reward, etc.) make it suitable for different goals and stages of a company's life.
- It is an alternative and cheap way to market test, gather feedback and validate a business model while simultaneously raising capital.
- Creates community and engagement: investors in a crowdfunding campaign become part of a community that has a high interest in the company and supports its long-term success.
- Expands the company's professional network, allowing new skills and knowledge to be acquired as well.
- Allows the company to set the terms of capital raising upstream, rather than being subject to those set by others.
- Improves the company's financial reputation, making it easier to obtain other financing and, in the case of equity crowdfunding, to access the regulated market.
- It enhances the professional experience of the team.
This long list of benefits makes it clear that crowdfunding is not merely a financial transaction, but a true overall growth strategy for a company.
Crowdfunding: the disadvantages
Like all business activities, crowdfunding can have "cons" to which you are exposed, but which you can for the most part foresee and control if you approach this experience with the right preparation.
- In case of failure, time, money, and tangible and intangible resources are lost.
- The risk of failure also exposes the company to possible reputational damage, which can lead to a loss of credibility.
- The exposure and visibility given by a crowdfunding campaign amplifies any miscommunication.
- The disclosure of sensitive company information could be exploited by competitors.
- Especially in the case of equity crowdfunding, any noncompliance with regulations may result in legal penalties.
- Errors in communication and relationship management with the community can harm the latter and create distrust.
- In the case of reward crowdfunding, failing to get backers what was promised can lead to lawsuits (in addition to reputational damage).
- The cost of capital can prove high if one underestimates the cost of crowdfunding and the preparation required to do it.
- In the case of equity crowdfunding, bringing so many new partners into the company can lead to governance problems.
These risks are partly part of the game and partly to be prevented by proper preparation.
How to control the pros and cons of crowdfunding
To bring an equity crowdfunding campaign to success by taking advantage of all its pros and avoiding its cons, it is first necessary to understand the tool you have in your hands. Whether it is equity, lending, reward or even STO, the first thing to do is to study it: study its mechanisms, study the experiences of those who have already been through it, discover its secrets.
In order to ward off the disadvantages of crowdfunding, it is a good idea to carefully check that you meet the following requirements before embarking on the venture:
- precise objectives
- time to devote
- specific training for the people on the team who are in charge of it
- a budget commensurate with the goals
- a clear brand identity to convey
- compliant documentation
- long-term horizon for post-campaign management (including the framing of new equity crowdfunding partners).
The list seems long, but it is indispensable, because it is the foundation of a solid project. And with this list, we haven't even gotten to campaign preparation: that is called precrowd and is just as critical to achieving the goal and testing the communication.
Setbacks can always happen, even to the most prepared people. But the latter will be more ready to respond to them.
To take full advantage of all the benefits of crowdfunding, however, one must understand that it should be seen as a marketing tool and direct one's efforts toward building a solid community and a network of useful contacts, rather than toward raising capital. One must live the journey as if it were more important than the goal, because it is. Finally, one must be ready to embark on a new path once the old one is over: making capital raising a business asset, rather than treating it as a one-off operation, is the only way to derive maximum benefit from it.
Turbo Crowd has drawn on the experience of many crowdfunding campaigns, through which it has been able to field the pros and cons of this valuable tool: you will find many resources at your disposal in the Facebook group and blog. If you want to undertake a crowdfunding campaign in an informed way, book a free initial consultation with us!