Why You Should Stay Away from Crowdfunding for Businesses
It was challenging for business owners in the past to find funding. However, entrepreneurs nowadays can find funding from an array of sources such as crowdfunding. You post your business idea on certain websites where investors offer funds in exchange for future equity, discounts and products. You might be considering crowdfunding to secure funding after being rejected by banks. While you might be tempted to opt for this financing option for your small business, it might not be the best idea. Here are some of the reasons why crowdsourcing might not be suitable for your business.
Limit M&A Exists
Having several crowdfunded investors might make your business an unappealing merger and acquisition target. Acquirers might not be in a position to purchase your business using acquirers’ securities as consideration. In that case, it might prove impossible to register a merger and acquisition deal.
Choose Wrong Platforms
You may need a suitable online platform or website when looking for business finance through crowdfunding. The process might be challenging, mainly if you have never used this financing option before. Some sites are often better than others. That’s why it’s wise to do some research before posting your vision on any online platform seeking funding.
Lack of Guarantees
You can never be sure to get an investor for your venture. You might not get the support you require, no matter how attractive your deal is or the rewards or equity you offer. You could spend months looking for an investor and fail to get one. That means that you may lose your time waiting on an investor. It would be wise to source funding from other options such as small business loans or lines of credit.
Future Financing options
Businesses that get funds through crowdsourcing are often owned by large numbers of investors who have small stakes in the company. The structure could prevent a venture capitalist or angel investor from investing in your business. Most angel investors and venture capitalists often avoid investing in companies owned by hundreds of inexperienced shareholders.
Loose Much Equity
You could be raising funds for a single product, and offering it to your investors in exchange for funds. Startups without a product are often required to raise capital by giving away some company rights. You could give up more equity than you want to if you fail to structure the crowdsourcing campaign carefully.
Realizing a dream can be hard for entrepreneurs. Crowdfunding sites can even make it harder. Now that you know some of the reasons you might want to avoid crowdsourcing, it’s advisable to seek other financing options.