Acquiring finance for commercial ventures traditionally involved asking a handful of benefactors for substantial investment, a practice favouring those with business experience. These days, modern technology allows individuals with lucrative ideas to bypass the antiquated process and pitch their products directly to the public. Crowdfunding is emerging as a viable way for small businesses to raise funds from a large number of people, all typically contributing small amounts online, to take their concepts from the drawing board to reality. This growing trend has created a wave of online platforms which allow entrepreneurs to exchange pledges with rewards or equity in their business.
In a process that only requires a few clicks to complete, it’s not hard to see why so many businesses in the early stages of funding are opting for a quicker and more convenient method of obtaining capital. Despite all of its redeeming qualities, crowdfunding still has some understated drawbacks - so is it really worth the hype?
Emergent technologies have provided marketers with new options on various platforms to produce outcomes that are entirely customer driven. This is probably why crowdfunding as a marketing exercise is becoming increasingly popular amongst multinational conglomerates as well as startups and small businesses.
Crowdfunding can extend a business’s visibility past specialist angel investors, to a wider community of influencers and enthusiasts where these funding campaigns can be used as novel marketing tools. These platforms are an ideal way of obtaining market validation and further information about a business’s potential consumers. It has modernised the traditional focus group with real time feedback from a larger and more representative demographic, providing more reliable indications of market activity.
Crowdfunding allows customers to become part of the development of a brand, instead of passively consuming an online advertisement. This marketing technology encourages activity and revolves around engagement, which in turn creates stronger bonds between businesses and their donors. Making this process public creates brand advocates who can generate organic discourse and shares on external social media platforms.
While a great method of raising necessary funds for business ventures, equity crowdfunding divvies
ownership to a multitude of small investors. Depending on the campaign and its donors, a portion of largely inexperienced shareholders are then given authority over decision-making. This means that businesses using this method of financing have several shareholders to consult, satisfy and pay, placing a higher amount of pressure on accountants.
Equity crowdfunding has a lot of complex rules and regulations which must be adhered to. Ensuring that your campaign follows the regulator’s guidelines requires further expenditure by the business; companies need expertise from the accountant and more time spent on administrative tasks. The Financial Conduct Authority specifies how the company selling shares will be committed to some level of disclosure, meaning that every shareholder is entitled to the same level of transparency regarding financial documentation. Therefore, successful crowdfunding campaigns could actually create a considerable amount of admin for the beneficiaries and their accountants.
Similarly to other sensitive online documents and data, crowdfunding platforms are subject to targeted threats such as hackers and malware used to compromise valuable data which could also lead to potential loss of investments. This vulnerability within online crowdfunding services makes it more difficult for accountants to track cashflow and then consequently harder to budget and forecast.
What’s Best for Your Business?
Crowdfunding is still a relatively new platform but success stories have emerged across multiple industries. It can be the most viable source of funding for entrepreneurs and new businesses. However, it’s worth knowing the risks involved if it doesn’t go well. Each company’s campaign is different but a successful crowdfunding campaign requires a comprehensive planning stage where businesses carry out enough preparation. If you need any financial advice for a new business venture then contact experts at Cottons Accountants to make the process safer, simpler and suited to your needs.