Crowdfunding: advantages and disadvantages

Crowdfunding is an accessible way to raise start-up funds, particularly for fledgling ventures!

Still, there are advantages and disadvantages to crowdfunding you must consider before creating a new project. You’ll also need to invest considerable time and energy into building up support.

Let’s look at some of the pros and cons of raising investment through crowdfunding to help you assess whether this is a viable option for your business.

Creating a winning crowdfunding pitch

The first factor to think about is the public nature of your pitch.

If it goes well, your pitch acts as a form of marketing that can raise substantial backing and interest in your business.

However, if the project fails, it’s visible and can create reputational damage with those who have pledged money.

To improve your chances of success, a crowdfunded project should be:

  • Understandable, with precise targets for fundraising amounts and objectives.
  • Visible and pitched to the right demographic of potential supporters.
  • Finite, so it’s clear when the project will end and what it intends to achieve.

New start-ups can raise hundreds of thousands of pounds in a matter of days – but that’s very much dependent on the quality of the pitch.

You need to raise your full target amount to receive the total investment.

Failure to reach the target usually means that the project fails and doesn’t result in a capital injection into your business.

Is crowdfunding viable for all start-up businesses?

Like in our article, grants advantages and disadvantages, some types of fundraising are better suited to specific sectors than others.

Crowdfunding works best for:

  • Niche products or innovative ideas
  • Concepts that are new to the public
  • Challenger businesses with a fresh technique
  • Sectors where mainstream investment isn’t likely

The issue is that the marketing for a crowdfunding project can be significant.

As a new start-up, you need time and funds to publish your project, engage with potential investors, and connect with your community.

Even incredible ideas fail without sufficient backing, so the most successful crowdfunding pitches have an established network and strong brand awareness.

How secure is crowdfunding?

One of the most significant downsides to crowdfunding is that you need to put steps in place to protect your intellectual property.

Even if your concept is groundbreaking, you’ll need to disclose the details to attract investment, which leaves the idea vulnerable to competitors. Competing businesses can copy ideas before your crowdfunding project completes, allowing them to launch your idea before you’ve finalised it.

It’s vital to build intellectual property protection to avoid this risk before posting any crowdfunding material online. That could be:

  • Trademarks
  • Copyright ownership
  • Patents

Different crowdfunding platforms also have varying legal disclosures, so make sure you seek professional advice before proceeding.

Which crowdfunding platform is best suited to UK SMEs?

There are several crowdfunding sources and online platforms, but they aren’t all created equal.

For example, some platforms offer equity crowdfunding and others debt crowdfunding. The best option for you just depends on what investment you’re seeking.

As a business owner, you must prepare to answer investor queries, so you must be poised with all the information you need.

For example, if you’re wondering, ‘can a sole trader have employees?‘, and your pitch includes plans for using capital for a workforce expansion project, you’ll need to deal with related enquiries.

Crowdfunding might be a simple way for forward-thinking companies to raise substantial investment, but it does come at a cost.

Platforms can charge a wide array of fees, such as:

  • Administration charges
  • Legal costs
  • Success levies
  • Transaction charges
  • Commissions

Therefore, if you’re confident that crowdfunding is the right option, you must assess the associated fees before posting your project.

Protecting your legal interests before pitching for crowdfunded investment

Different providers have their own pledge processes and models, so investors need to feel comfortable remitting money to your chosen platform.

Having oversight of the platform’s credibility is a vital part of the process.

Reviewing those legal terms and having watertight control over your intellectual property is just as important as the pitch itself.

For more detailed advice about UK crowdfunding options or how to protect your ideas before an investment pitch, don’t hesitate to contact the Harper James Solicitors team for professional, impartial advice.

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