5 Emerging Challenges Of Crowdfunding As A Fundraising Tool

The prevalence of the internet has led to incredible innovations being made when it comes to finance. For example, paycheck stub technology has made salary disbursement convenient and efficient for companies. Similarly, another financial tool that is observed is crowdfunding.

Crowdfunding involves gaining capital and finances from many people who usually provide a small investment on the internet. It is a great fundraising tool that enables entrepreneurs to finance their projects. This is done by pitching them to people online through crowdfunding websites and social media. In this way, entrepreneurs can get a larger pool of investors than traditional means of fundraising.

However, just like any tool or platform, crowdfunding has challenges if you are an entrepreneur or company. Some have emerged as crowdfunding has become popular because of certain controversies and failed fundraisers. We will look at these challenges in the following article. Let’s dive in.

 

1. Clash between hype and investor expectations

When it comes to crowdfunding, creating hype is a crucial factor. This is because hype allows investors to gather the large pool of investors necessary to raise funds for the project. For example, a video creator might show concept art and demos about their game ideas which will hype people up and be interested in playing such a game. However, when you create hype, you also raise investor expectations. They start picturing that the project will be a great success without being realistic about what the entrepreneur can realistically achieve with the plan they have provided.

 

2. Creating trust among investors

Creating trust among investors is essential if you want your campaign to be successful. And yet, it can be a big challenge. This is because many investors are still familiarizing themselves with how crowdfunding works. Additionally, crowdfunding has existed for enough time. There are many controversial examples of crowdfunding projects that did not pan out and ended up being people selling false promises. As a result, investors tend to be skeptical about crowdfunding projects, especially if the entrepreneur is inexperienced or not reputable.

 

3. Choosing the right platform

There are many crowdsourcing platforms available to choose from due to their increasing popularity. Because of the extensive competition, each platform has begun specializing in specific areas to attract a particular chunk of the crowdfunding market. This means entrepreneurs and companies have many platforms to choose from. It can be challenging to ascertain the best one. Some specialize in lower fees, some in extensive communities, and others in larger incentives. Ensuring that those companies are following the correct compliance laws also can help with the choice. For example, if a fund is generally soliciting investors, it must meet an exemption such as Rule 506(c).  This is why companies and entrepreneurs must properly research before opting for a crowdfunding platform.

 

4. Idea Theft

Idea theft is a significant problem that tends to occur with crowdfunding projects. An entrepreneur or company may have a new idea not seen on the market and will present it as part of their project. However, since this unique idea is now available to everyone, this can result in other entrepreneurs stealing the idea. They then utilize their resources to get the better of the original entrepreneur. This can be incredibly damaging as a lot of time and resources may likely have gone into developing this idea. This is why entrepreneurs must have a balance between revealing enough information to investors while still being secretive. Additionally, they should take advantage of copyright laws and NDAs to protect ideas.

 

5. Constant Preparation and Communication

Many entrepreneurs do not realize how much work actually goes into creating a successful crowdfunding project. Additionally, the work never ends as entrepreneurs and companies have to constantly provide updates to investors and communicate how the project is getting along. This means creating detailed financial reports, updated forecasts, challenges, new plans of action, and so on. However, investors will lose interest if they create a crowdfunding project but don’t prepare properly for the work ahead. Communities are always discussing the project with each other. If a company is not prepared or professional with communication, the investors will notice and lose confidence. So, fundraising momentum will slow down rapidly.

 

In conclusion

Crowdfunding can be an excellent fundraising tool. It allows entrepreneurs and companies to use internet platforms to pitch their ideas and get funds. However, it has its challenges, as we have seen in this article. Entrepreneurs and companies must be aware of them and take the necessary measures to counter them. This will allow their crowdfunding projects to be a success. We hope this article has been insightful and has made you aware of the emerging challenges with crowdfunding as a fundraising tool.