This is Part 2 in a series on crowd funding. (Here is Part 1 - The Advantages of Crowd Funding.)
Despite the many advantages and opportunities available with fundraising through crowd funding, there can be significant downside risks. I've listed five below:
- No stealth for your startup - crowd funding success depends on getting the word out about your opportunity to many potential investors. Unfortunately, this also has the downside of broadcasting your product or service concept at a very early stage, inviting competition. When designing your communications, you will need to walk a fine line divulging enough to get potential investors excited, while not over-communicating and tipping off potential competitors.
- Attracting high-quality employees may be more difficult, since highly qualified candidates may question why you were not able to raise venture capital investment through traditional channels. You'll need to get your "messaging" clear and concise with potential employees. Having a strategy outlined for additional funding, if necessary, will help.
- The potentially large number of investors will require organized and automated communication processes - so you will need to remain vigilant in your communication policies. Understanding what kinds of things you can communicate with potential or existing investors can spell the difference between adequate communication and disgruntled investors.
- With the potentially large number of investors, if your company does not perform as expected, you have a greater pool of disgruntled investors who could potentially bring legal action against you. Crowd funding your company does not necessarily get you hundreds of new “friends". Some investors, particularly ones who have invested larger amounts in your company, may be unhappy with the results. Having a knowledgeable business attorney who is actively engaged in your progress may be worth the extra money.
- If you sell a product and have a large number of orders, you run the risk of not meeting demand in a timely manner, hurting your reputation and brand. A successful crowd funding campaign is only the beginning of producing results for your customers. Your relationships with your company’s service or product vendors are critical in order to ramp up production and/or service features necessary to keep your customers and investors happy.
Next time, I'll have a list of crowd funding "Do's and Don'ts".