Crowdfunding has several benefits that correspond to numerous applications. However, this alternative type of funding has disadvantages or more specifically, drawbacks and risks.
Disadvantages and Criticisms: Drawbacks and Risks of Crowdfunding
• Projects need to be compelling enough to gain public interest and draw funding from the crowd. Fund seekers need to provide a viable selling proposition.
• There is a need to demonstrate competency in digital marketing because crowdfunding is Internet-mediated. Funding campaigns should come with a digital marketing strategy.
• A drawback of crowdfunding is that it is not an absolute financing option. There are cases in which a project can benefit from a single angel investor or venture capitalist.
• Fund seekers with product ideas or prototypes risk getting their intellectual property stolen by competitors. Crowdfunding requires them to be transparent about their projects.
• There is also a problem with overburdening a fund seeker with the required rapport-building activities with funders. This can be time-consuming and costly.
• Another disadvantage involved in crowdfunding is that it does not have rigid regulation. Scams or frauds are rampant in numerous crowdfunding platforms.
• Fund seeker might oversell their projects in an attempt to attract funders. Meanwhile, funders can put unrealistic expectations.
• Herding is another crowdfunding risk. People without experience in investment tend to make decisions based on emotions and fad.
• There can be information asymmetry in crowdfunding. This phenomenon increases as the geographic distance between a fund seeker and its funders widens.
A detailed and long-form version of this article appears on Profolus.com authored by Mathew Emmanuel Pineda with the title “Advantages and Disadvantages of Crowdfunding.”