Concerns and challenges of crowdfunding for startup owners

It was not many years ago that you had only two options to gather the fund required to embark upon your business: either you had to take out a loan from a bank, or you needed to borrow it from your closest friends and family. With the progression of financial technologies (fintech) these days, you no longer have to have in your pocket all the capital you need to start your business.

In recent years, the miracle of crowdfunding has come to facilitate and simplify igniting businesses for everyone. In other words, having an idea is all you need.

What is crowdfunding, and what are the types?

Crowdfunding is a method through which you attract the capital to start your business with the help of contributions. You can ask for financial support through social media or online crowdfunding platforms. In this method, you receive small amounts of money from numerous people. To elaborate on that more deeply, let’s see the four main types of crowdfunding systems:

• Donation-based crowdfunding: In this method, as the name suggests, a plethora of donors contribute small or large amounts of money to a business. They get nothing financial in return but support the business as sponsors. Examples of this method are planting trees, digging wells in dry areas to provide water, providing poor families with medical assistance, etc.
• Reward-based crowdfunding: Donors in this method support a business but expect some “rewards” in return. The reward can be in several shapes: a service or product that your business sells, discount cards to buy from your business, etc.
• Debt crowdfunding: Debt crowdfunding allows a business holder to borrow small amounts of money from a large crowd. The lenders in exchange for their support, expect a principal plus interest. To rephrase it, the process is somewhat similar to taking out a loan; however, in this method in place of taking a single massive loan from a bank, you can take many small loans from different people.
• Equity crowdfunding: Through equity crowdfunding, business owners receive financial support at the cost of giving up a specific percentage of their business ownership. This method is so beneficial to boost the startup of a business or to help it rapidly pass the growth stages.

Concerns and challenges for startup owners

Despite all of the positive factors shining on paper about crowdfunding, there are plenty of challenges and concerns to consider when starting a business. Crowdfunding, in its essence, may seem a significantly better method to gather funds for a business in comparison with all other traditional methods, but it is a wise piece of advice for a startup business to consider the challenges priorly in order to take action in time.

But what are the challenges to consider before even intending to make use of crowdfunding? The following items are the most common challenges the startup owners may face almost sequentially:

Which type of crowdfunding?

The very first question is which type of crowdfunding is best for a startup. Business owners first need to peruse the methods carefully and match the details of each with their specific business and campaign. Then, they can find out which method is better as per their plans and the current budget.

One thing startups have to carefully keep in mind is that in equity and reward-based methods, investors benefit from the project too. Businesses need to set their reward in an optimum way; they should beware that the reward should guarantee a win-win program in which all the while they fulfill the project, investors can also find it beneficial to support them.

Furthermore, through equity crowdfunding investors who will possess a big share of the business may prefer to have a say in how the business is run. This can deviate the preset objectives of the business from what has been priorly scheduled.

Therefore, it is of high importance to choose the method with eyes widely open.

Different platforms

Shortly after choosing the sufficient crowdfunding method, it will be time to choose a suitable platform. Currently, there are several crowdfunding platforms and websites on the Internet. Entrepreneurs can choose each one they want, but choosing the one that best fits their business needs can be so challenging.

In short, new startups better keep in mind some criteria when picking the right platform. To mention only some, they need to consider the number and type of visitors a platform has, the money it takes to run a campaign, in addition to their legal terms and conditions.

Also, there are multiple fake websites trying to deceive business owners (and investors), pretending to be an eligible platform. Two of the most well-known crowdfunding platforms are Kickstarter and IndieGoGo; however, considering other platforms to find which is best for a specific business is a must for business owners.

One more thing that startups should consider is how much they need to pay the platform to host their project. In this regard, it is good to know that in the future crowdfunding platforms can sell their own cryptocurrency to startup owners in order to reduce the cost of hosting projects for them. After all, blockchain platforms offer much flexibility and transparency.

Building trust

Building trust comes as the next challenge. Startups definitely need to create brand credibility to stimulate investors to help them. They have to build trust for their business. This is especially important when a business is going to rise from ashes, and literally nobody knows it.

Business owners have to express their plan as promising as it can grab investors’ attention. Otherwise, they will fail to attract them.

Apart from how someone tries to build trust, the fact that there have been several fraudulent companies working in this field makes investors more cautious when investing in a campaign.

Deadlines and targets

This challenge can be a part of the previous one. Entrepreneurs should be careful about this one. They have to announce their targets and goal achievement plans meticulously.

If they fail to reach targets in the announced time schedule, er even if they set unrealistic timetables, they will be significantly prone to lose investors’ interest and get insufficient amounts of money to commence the project. Or even worse, potential investors may get their money back leaving the business empty-handed.

Stealing the ideas

When running a campaign, some people may steal ideas. Subsequently, they may run it on their own campaign, even before the real owner attracts enough investors. Some startups may raise thousands of dollars in just a few days. If a startup idea is as promising as this and shows such a public display of its idea, it may be easily copied without consent.

To stop this, startup owners should discuss the project details in private chats. Additionally, they need to closely monitor their campaign to see who is watching them.

What is more, startups may unknowingly infringe on other copyright and patents. To hinder this issue, they can have a lawyer check to see if their project is legally protected.

Accounting expert

The next challenge is what startups may face at the final stages. If business owners are not into accounting and related rules, then they are definitely going to need an expert helping them along the road. Is the money they have gathered considered as capital? Or, it is technically considered as income? This is only one in uncountable questions that will come across if they are not familiar with the rules.

The solution is to find a highly qualified expert who can guide them through these things.

Build interest in advance

The last challenge to mention here is somehow the first one startup owners must consider. If they run their campaign and grab the intended fund, this is too late for them to try to generate interest now.

Experts say the entrepreneurs should build interest in their campaign roughly three to four months prior to commencing it. This will help them stride toward the preset goals quickly.

Not only can a failed project easily damage the reputation of a brand, but it can even stain the name of investors supporting that project too.

Other challenges?

If you are a business owner, did you run a campaign to crowdfund your business? What other challenges did you face? Write them in the comments below, if you did not see them above.