Guide

Crowdfunding

Advantages and disadvantages of crowdfunding

If you are considering raising finance for your business, project or venture through crowdfunding, there are a number of factors that you might want to consider.

Advantages

Eight advantages of crowdfunding:

  • it can be a fast way to raise finance with no upfront fees
  • pitching a project or business through the online platform can be a valuable form of marketing and result in media attention
  • sharing your idea, you can often get feedback and expert guidance on how to improve it
  • it is a good way to test the public’s reaction to your product/idea - if people are keen to invest it is a good sign that the your idea could work well in the market
  • investors can track your progress - this may help you to promote your brand through their networks
  • ideas that may not appeal to conventional investors can often get financed more easily
  • your investors can often become your most loyal customers through the financing process
  • it’s an alternative finance option if you have struggled to get bank loans or traditional funding

Disadvantages

Six disadvantages of crowdfunding:

  • it will not necessarily be an easier process to go through compared to the more traditional ways of raising finance – not all projects that apply to crowdfunding platforms get onto them
  • when you are on your chosen platform, you need to do a lot of work in building up interest before the project launches – significant resources (money and/or time) may be required
  • if you don’t reach your funding target, any finance that has been pledged will usually be returned to your investors and you will receive nothing
  • failed projects risk damage to the reputation of your business and people who have pledged money to you
  • if you haven’t protected your business idea with a patent or copyright, someone may see it on a crowdfunding site and steal your concept
  • getting the rewards or returns wrong can mean giving away too much of the business to investors

For a comprehensive overview of crowdfunding as an alternative form of raising finance for your business, read Nesta's report on understanding alternative finance (PDF, 4MB).

Before deciding on a crowdfunding platform for investment, you might consider whether other forms of finance could better meet your needs - see alternatives to equity finance.