Is crowd funding the best way to find financing for a start-up company?
Debate Rounds (5)
Argument: Is crowd funding the "best" way?
This is a very subjective question as it really matters how you define "best".
If Best is defined as the most easiest way to get cash to start your project? Then no.
Crowd funding is a very fickle beast and heavily dependent on the popularity of the individual.
If we look at recent case of Star Citizen [ Largest Crowd Funded Project Recorded ] vs Elite Frontier you will see how much popularity will make a difference. Chris Roberts helms Star Citizen which has raised more than $60 million through crowd funding. While David Braben who helms Elite Dangerous earned a little over $3 million. Yet you look at most of the projects fail because they don't have that name presence.
Argument: So start-up companies don't have to go through the long process before hand of pitching and negotiating about the project that needs funding.
The statement is probably around 1/3 accurate. Crowd funding requires much more effort and is more dangerous in the end of the day to the start-up. Many crowd funding projects have failed even when they were funded because they skipped on research. The creator of the project simply proposes the idea without properly calculating expenditure which would have been done if they had to present their case to a financial institution. Making things easier ends up also making more mistakes.
A classical example is "Pictures for Sad Children" - a kickstarter project which was successfully funded. But he did not properly calculate the expenditure of his rewards and product so he ended up loosing money and unable to fill his obligations. So he instead burned the remaining books in a public showing of anger.
or the Open Source Fusion Reactor which asked for a paltry $3000 - which of course was kickstarted but ended up failing due to lack of funds.
or Code Hero the famous project which said they will make learning programming a game. Through horrific mismanagement of funds, escape from public scrutiny, and expenditure of personal finances he still has yet to produce a proper version of his project as he promised.
I could keep going on, but I think my point has become apparently clear. Crowd funding promotes an excessively easy access to funds in one hand but at the same time promoting a high failure rate due to the lack these people do no adequately prepare before asking for said funds as you would have had to do when facing a financial institution.
Your other point is not having the long process of pitching. But in fact they do - companies which lack name presence will have to take an active effort to advertise to millions of individuals to get a tiny percentage to contribute to their cause. It isn't as if everyone is forced daily to go through every project in kickstarter to contribute. So you are no longer pitching your idea to just a few handful of people, instead you have to pitch your idea to millions of people in different locations hoping to garner enough interest to get your project off the ground. Which requires much more effort then simply posting the idea. Essentially the reason many projects fail to get funded.
All these issues are much easier if you are willing to take the risk and get a loan. Which is arguably has a much higher success rate of both getting access to the funds as well as successfully launching the project due to proper financial research before starting it.
For instance, with social media, website presence, videos and the delivery of passionate communications. So It forces messaging to be clear, concise and easily understood by the target group to get an immediate call for action. Marketing exposure is important and most early stage companies are not very good at doing this.
Then there is the other issue simply marketing is not enough to get your product out of the door. Setting up manufacturing and distribution deals is something many kick starters fail to do prior to marketing. As shown from the examples previously. Also as for getting money, sites like seeders and crowd cube have shown nearly 80%(pc) of the companies have withdrawn from not receiving enough money.
If 80% of companies fail to receive initial investment money - it only comes to show how much harder it is to successfully get funded by crowd funding vrs traditional means.
One unique benefit is that crowdfunding establishes a customer base: since entrepreneurs can get an insight into who is buying their offering and find out why the offering resonates with them. This allows entrepreneurs to create compelling tactics to expand their respective customer acquisition strategies. It also allows for experimentation by finding out what works and doesn"t work from a customer acquisition perspective.
ARGUMENT: It also allows for experimentation by finding out what works and doesn't work from a customer acquisition perspective.
It is actually quite the opposite - you have much less room for experimentation. The more people who buy into your idea the more people who want that particular idea. Not a variation of it. When it comes to getting investment from a single person you only need to convince 1 person when you want to make changes to your initial idea. Now if you want to change from the initial concept you have to convince a few thousand people. So in another words once you pitch the idea - that core idea is almost set in stone. The only practical way to change it is to cancel the crowd funding and pitch a fresh one or risk the fury of those who paid or risk the change and find out later you don't have enough money later on.
This is something you do before you ever even asking for money in both CF or Classical. It is also quite dangerous to ask for changes to the core design - as you would have already taken money from people who paid for your core concept and may not agree with the new changes.
For example say you found a nice watch - black steel plated executive look - you thought it was a great idea and pitch so you gave the creator money. The person making it starts asks for suggestions, all of a sudden majority of people say they don't want black watch they want pink. They also don't want it executive look they want it with Penguins but keep the rest of the features. Now you are not going to be happy you paid for something you did not want. As the famous saying goes "too many cooks spoil the broth" - and the more people you ask for suggestions - it is not going to have unanimous results. Suggestions and modifications are always a good thing don't get me wrong. The issue with CF though is since you have so many people at the table who already paid - you risk angering a large base by implementing suggestions some may not agree with. Also once you start giving refunds you risk a potential avalanche of returns in the future.
As for a semi-expected "new features instead" counterargument - the biggest issue is funding and implementation. Kickstarter it self said stretch goals and modifications of the core design is best avoided as they are witnessing a growing number of kickstarters which fail to make them become a reality.
So in another words its best to stick with your original idea - make it become a reality and then implement new ideas in the next version of it once you prove you can make the first batch without issue.
However, the whole point of crowd funding is to gain input from the crowd. Crowdfunding is one of the four forms of crowd sourcing. The definition of crowdsourcing is:
"Simply defined, crowdsourcing represents the act of a company or institution taking a function once performed by employees and outsourcing it to an undefined (and generally large) network of people in the form of an open call. This can take the form of peer-production (when the job is performed collaboratively), but is also often undertaken by sole individuals. The crucial prerequisite is the use of the open call format and the large network of potential laborers."
Thus although you have to start with a base, with crowdfunding you need input / feedback from the crowd and the target audience in order to make it work. This can be financial input or input related to product features, and other issues.
Just because the project is crowd funding has no direct correlation with crowd sourcing. After all crowd sourcing is a messy business with a lot of legal issues dealing with licensing and copyright . If you are planning on distributing it with the main product you have to have the author of the content sign the rights to their contribution to you first. Or you have to distribute it separately under notification of a license specific to that regard also., as you have to determine if the content can only be free or if they can charge for it. If they can charge for it how does the distribution pf profits go? Was their any proprietary software required to run that additional content and require payment to another 3rd party? The second you associate a paid product with crowd sourcing you get into legal issues quite easily.
Moral of the story?
Crowd Sourcing is a messy business when dealing with paid content. It is not related to crowd funding in anyway besides name.
Crowd funding is one option for getting money, but it is not the best option. As sites like Seeders and Crowd Cube have shown there is nearly an 80% fail rate when it comes to even acquiring funds. An as repeated history of events in kickstarter have shown - even when funded, because of poor planning due to easy access of funds the project is likely to fail. Traditional source may require more effort on your part - but that effort directly translates to not only getting funded but also successfully releasing a product.
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