Drawbacks and Risks of Crowdfunding

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.”

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