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Measuring the Merits of Crowdfunding versus Traditional Investment Sources

October 02, 2013

The pros and cons of nontraditional funding resources.

The Internet has helped entrepreneurs accomplish all sorts of goals, from raising awareness of products and services via marketing campaigns to improving the shopping experience with web-based customer experiences. Now, some entrepreneurs are even using the World Wide Web as a funding resource, with business owners turning to sites such as Kickstarter to help generate funds. People from all industries, from electronics to film, have made use of these crowdfunding sites to earn the money they need to develop and enhance their products.

However, that doesn’t mean Kickstarter and other crowdfunding platforms should replace the role of conventional investors and funding sources. Each approach has its own pros and cons.
For instance, Kickstarter is a tremendously popular website that is teaming with a wide variety of potential backers. PBS suggested thinking of it as a way to both market a product concept and generate funding. It’s also an established website, so it can go a long way in establishing credibility.

Conversely, there are some major drawbacks as well, the biggest of which is the exposure of an entrepreneur’s concept. Crowdfunding websites put entrepreneurs’ product and offering ideas out into the world, which means if they don’t get their funding soon, a competitor could take their idea and beat them to market with a similar product.

Traditional investors, on the other hand, may be harder to secure funding from in the first place. By going straight to the people, businesses can often get money based on the value of their concept alone, whereas investors are more critical, looking at aspects such as an entrepreneur’s access to other sources of capital.

On the other hand, however, investors have a lot of pros as well. For instance, they can offer business guidance that may help entrepreneurs get their companies off the ground. Entrepreneurs should consider both crowdfunding, private equity and venture capital firms as they look to launch their companies, as all options are viable.

Sources:
http://www.pbs.org/idealab/2010/11/the-pros-and-cons-of-using-kickstarter-to-fundraise316/
http://thenextweb.com/entrepreneur/2013/07/27/why-kickstarter-and-crowdfunding-cant-replace-traditional-investors/

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