If you have ever researched creative ways to fund your small business, you may have come across Kickstarter, a popular capital-raising website based on the concept of crowdfunding. Crowdfunding operates on the idea that many individuals will donate small sums of money to fund a project they support. With enough small investments, the business owner will have the financing he or she needs. Investors don’t have to spend a lot and the business owner raises capital – it seems like a win-win. Soon after crowdsourcing gained traction as a source of funding, though, many small business owners realized the risks and pitfalls of relying on this type of financial support.
Pros and Cons of Kickstarter
Entrepreneurs take to Kickstarter with high hopes for raising the capital they need to get a business or idea off the ground. Kickstarter success stories, including Pebble Watches and the Coolest Cooler, inspire many startups to use this platform, thinking of it as the promised land of small business funding. The pros of using Kickstarter are certainly attractive – it’s open to everyone, its all-or-nothing funding model mitigates risk, and you can potentially make millions of dollars. The lure of being an overnight success leads many to start profiles and hope for the best.
The cons, however, often are hidden and people don’t realize that until it’s too late. For example, Kickstarter charges fees for services. The site takes 5 percent of your pledges. Amazon takes another 2 percent. It can also be difficult to take funding offline. The money you make at in-person events cannot go toward your project in Kickstarter unless someone other than yourself pledges the amount online. You cannot pledge toward your own project. What’s more, the all-or-nothing system can be confusing to business owners and pledges. Kickstarter does not charge any pledges until your project reaches its funding goal. This can result in people being charged months after they made their pledges.
The biggest con is that there is no guarantee on funds. Putting all your eggs into this basket can lead to a lot of wasted time, energy, and resources – not to mention discouragement. If your Kickstarter campaign doesn’t meet or exceed your funding goal, you won’t receive a dime of the money. The rare campaigns that receive hundreds of thousands of dollars (or even millions) give many business owners false hope that the same will happen for them. This can lead to many failed fundraisers.
Kickstarter vs. Other Funding Options
Kickstarter isn’t the only alternative to traditional small business loans. Crowdfunding can be a viable way to raise capital, but only with a lot of luck, popularity (i.e., celebrity business owners), or intense campaigning. Other alternatives can guarantee small business funding – without going into debt or having to wait months for the money. Accounts receivable factoring is one way to receive funds without applying for a loan. This type of financing buys your unpaid customer invoices for immediate payment. Learn more about the benefits of invoice factoring to find out if it’s a better fit for you than Kickstarter would be.
According to Kickstarter’s own website, only 29 percent of projects aiming to raise $10,000 or less reach their goal. This percentage plummets to just 4 percent for projects with goals of $20,000-$100,000 and 0.09 percent for projects aiming for more than $100,000. The odds of receiving everything you need for your business are slim in Kickstarter.
Kickstarter also poses a risk if the business owner makes promises to pledges, such as debuting an item at a certain time. Delivering on promises late or not at all can leave a bad taste in customers’ mouths before your product even hits the market. Carefully consider Kickstarter’s pros and cons against other financing options before choosing this nontraditional method of raising capital.