The Drawbacks of Crowdfunding

Crowdfunding has been fairly popular for years. For centuries, authors and publishers would advertise upcoming book projects to scope out the public’s interest. If enough people indicated they would buy the book once it was release, then it would be written and published. Nowadays, the Internet has become a key source in gathering funds for specific projects. Since the Internet has a global reach, the amount raised during crowdfunding campaigns has increased dramatically. The highest crowdfunding project, EOS – a blockchain operating system, raised over 4 billion and the product hadn’t even gone live yet. However, this reliance on money donated from consumers poses an issue for people who are campaigning; particularly if the project fails. While we acknowledge there are positives to crowdfunding, you should be cautious when proceeding with your campaign for a few reasons:

1.  You’ll have to work for your funding

The idea of putting your project on a crowdfunding website and having people donate sounds simple enough, but many people don’t realize how much work generating interest is. The reason many crowdfunding campaigns fail is because there is a lack of promotion of the product or service beforehand. People want to know what they’re going to invest their money in and if there’s no information available, then the chances of them donating is reduced greatly. Prior to the launch of your crowdfunding campaign, you’ll have to start building interest through word of mouth and social media platforms. This can take up a lot of your time, which may not be worth it if the campaign falls through.

2.  You risk damaging the reputation of your brand

Failure will undoubtedly affect your brand, after all people will hesitate to financially back someone again after witnessing them fail the first time. Your entire campaign will have to be well-thought out in order for it to reach your target amount, as people will be keeping an eye on your campaign to see if you achieve your goal. If it does fail, you’ll risk your brand’s reputation as your investors may lose interest and refuse to fund any of your future endeavours.

3.  Your funds are allocated, leaving little room for your project to grow

A lot of crowdfunding campaigns offer incentives for people who may be interested in funding the project. However, when the money gathered from the campaign is distributed to the production of your product and these incentives, you may be left with very little to help your business’s growth. Your project may take off quick enough to ensure future funding for your business, but there’s no guarantee it will happen. Before you even launch your crowdfunding campaign, you should calculate how much each incentive and the production of the project will cost and give yourself a little wiggle room for future growth.

4.  You’ll lose your funding if the target amount isn’t reached

It’s not uncommon for a crowdfunding campaign to fall short of its goal. In fact, 60% of campaigns don’t get funded and very few make more than what their targeted amount was. For those who don’t reach their targeted amount, the money that has been graciously donated will be returned to those who invested in the idea, and you will walk away with nothing. It’s certainly a risk considering the amount of time you should be putting into your crowdfunding campaign, and you’ll be left with the decision on whether you want to start all over again.

Overall, the concept of crowdfunding is incredibly appealing. It seems like a good way for you to receive funding for any inspiring idea you may have. Yet, it’s certainly not as simple as it looks. Crowdfunding takes time and a lot of careful consideration. Before you launch your project on a crowdfunding site, you should draw up a plan which will cover the duration of your campaign and how you will follow through once the project has been funded.

If you have any further questions regarding crowdfunding or your business, contact us and we’ll be able to help.  

Disclaimer:

The information on this blog and website is provided by Lift Legal for educational purposes only. It is intended to give readers a general understanding of the law, not to provide specific legal advice. Information contained in these pages should not be used in place of competent legal advice from a licensed, practising lawyer in Alberta. Furthermore, by using this blog and website, you understand that no lawyer-client relationship exists between you and Lift Legal.