With more and more companies in a variety of sectors developing new crowdfunding campaigns, it makes sense to ask whether crowdfunding is likely to replace startup capital in the near future.
Crowdfunding is quite different from the traditional process of funding a business. Instead of going to endless meetings with venture capitalists and bank lenders, looking for someone who will loan enough money or buy enough shares to get a business off the ground, entrepreneurs go directly to their ultimate audience: the customers. If enough customers support the product, then the product gets made.
So will this end up making that VC and bank rounding a thing of the past? Probably not, but it is likely to dramatically change the process. It might even change society’s perception of who can succeed as an entrepreneur.
Crowdfunding has gotten a lot of attention over the last few years, but it’s not a perfect replacement for traditional funding.
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Crowdfunding has a number of important upsides. This has helped a huge number of tech projects get off the ground, made it possible for some creatives to continue to do the work they love to do while receiving a living wage, and let smaller companies gather the necessary capital to do major renovations or move to new locations. What are the big benefits of crowdfunding?
With VC funding, hopeful entrepreneurs try to convince a bunch of men in suits to give them the necessary capital to get their business off the ground. With crowdfunding, startups are speaking directly to the people they want to serve. This appeal can be much more direct and approachable.
Serves those who face systematic bias
Women, people of color, and those who are visibly disabled, face demonstrable systematic bias when they present pitches to banks and VC firms. Crowdfunding often levels those playing fields, allowing the project to take center stage instead of the creator.
Great for microbusinesses and creatives
Banks want to underwrite large loans to make their investments worthwhile. VC firms are searching for the next billion dollar unicorn. If a creative wants to make a comic book, or a company wants to raise enough money to move to a new location across the city, they’re unlikely to find lending to make that happen traditionally.
Not everything about crowdfunding is sunshine and roses; there’s a lot to work through before decided that crowdfunding directly through customers is the right choice for a company.
Exceptional marketing necessary
Raising a million dollars requires a lot of work and knowledge. There are so many crowdfunding platforms and so many people active on each platform that it can be difficult for an interested customer to separate the signal from the noise. Entrepreneurs hoping to get their project funded, therefore, need to push hard on social media to make sure that their project gets the attention it deserves.
Companies are advised to start building their contact lists several months, if not more, before the project is likely to go live.
Still have to be a savvy entrepreneur
Although gatekeeping is inherently steeped in perceptions about who can and cannot be a successful businessperson, it is true that VC firms and banks do look at business plans and long term goals and make decisions based on whether or not those plans are viable.
It is absolutely true that engaging possibilities are passed over because of bias against the creator; it is also true that entrepreneurs who are utter failures get funded by VC firms or take out loans which ultimately fall into default. But the need to prepare for those rounds may help some entrepreneurs refine their plans and create a project that is more likely to succeed.
Once a project has been funded, it also needs to be managed and run. Because the backers of a project are generally potential customers, not investors, they may be less understanding about delays and changes in product design. More than a few crowdfunding projects have been funded only to never be completed. This might sour someone on the entire concept of crowdfunding and damage their willingness to participate on the concept in the future.
Crowdfunding directly through customers has the potential to dramatically change the game around entrepreneurship and startup capital for generations. It is already showing some people that their biases about where successful projects happen are incorrect. VC interest is moving away from the two main American coasts and looking both internally, at places like Austin and Minneapolis, and externally, at countries in Africa and the Arab world, to find fascinating projects that have global appeal. But those changes aren’t instantaneous; in the meantime, crowdfunding will continue to flourish.