7 Reasons to Avoid Crowdfunding

By Rohit Arora, CEO, Biz2Credit

Published October 23, 2012
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,n the +a-e o& ti(ht credit $ar-ets, cro+d&undin( also -no+n as cro+dsourcin( arose as a source
to !ro*ide ca!ital to startu!s, es!ecially the creati*e ty!es% .his ne+ &or$ o& e/uity &inancin( enables a
co$!any to raises &undin( throu(h s$all contributions &ro$ a lar(e (rou! o& indi*iduals *ia an online
!lat&or$% Essentially, an entre!reneur $a-es an online !itch to a *irtual audience, +hich then decides
+hether or not to su!!ort the *enture by !led(in( $oney to+ards it%
0ere1s ho+ it +or-s" an entre!reneur !osts a descri!tion o& his or her !ro2ect, !roduct or ser*ice,
outlines the business !lan, !ro!oses the a$ount o& ca!ital needed, and e'!lains +hat contributors +ill
recei*e in return% Retail businesses so$eti$es !ro*ide !roduct in return &or the &unds they !ro*ide%
34ou (i*e $e startu! &undin( &or $y ba-ery, and , +ill deli*er (our$et cu!ca-es to you &or the ne't 10
Fridays%5 Other ti$es, the entre!reneurs !led(e cash re!ay$ent or they $ay o&&er an e/uity sta-e in the
*enture%
,n A!ril 2012, President Oba$a si(ned the 6u$!start Our Business 7tartu!s Act 36OB7 Act5 intended
to s!ur econo$ic (ro+th by enablin( s$all businesses to raise ca!ital $ore easily% .itle ,,, o& the
le(islation is -no+n as the Cro+d&undin( Act, +hich a$ends the re(istration re/uire$ents o& the
7ecurities Act o& 1833% .he ne+ la+ thus enables startu!s to raise s$all a$ounts o& e/uity ca!ital
throu(h cro+d&unders +ithout ha*in( to re(ister +ith the 7EC% 3.he online !lat&or$s the$sel*es $ust
be re(istered, ho+e*er%5 .he $a'i$u$ a$ount o& securities that a co$!any can sell to its in*estors
cannot e'ceed 91 $illion durin( a 12$onth !eriod% .he Cro+d&undin( Act is still a +or- in !ro(ress:
its !ro*isions ha*e not been &inalized%
;ean+hile, a cro+d&undin( !ortal is not !er$itted to !ro*ide in*est$ent ad*ice or $a-e
reco$$endations: cannot co$!ensate lead (enerators &or !ro*idin( the cro+dsourcin( !lat&or$ +ith
the !ersonal in&or$ation o& any !otential in*estor: and its directors 3or any !erson +ith a si$ilar status
or &unction5 $ust not ha*e a &inancial interest in any issuer that utilizes the ser*ices o& the
cro+dsourcin( !lat&or$%
Once thou(ht o& as a &ad, it is esti$ated that $ore than 91 billion +ill be $ade a*ailable to co$!anies
throu(h cro+d&undin( !lat&or$s% <ic-starter alone has channeled 9100 $illion and launched 30,000
!ro2ects at about a =>? success rate% ,ndie@o@o is another lar(e cro+d&undin( +ebsite% Founded in
200A, the cro+dsourcin( !ioneer has hel!ed raise $illions o& dollars &or tens o& thousands o&
ca$!ai(ns in 18= countries% Roc-et0ub is another leadin( cro+d&undin( site &or artists that has (otten
a lot o& !ress attention%
Other cro+d&unders &ill niches% For instance, 7tart7o$e@ood hel!s raise &unds &or social causes and
charitable initiati*es% .his is all *ery inno*ati*e, ho+e*er in $y o!inion cro+d&undin( has its
dra+bac-s%
No. 1: Crowdfunding works best for projects that require relativel s!all a!ounts of capital.
.his $ethod o& raisin( $oney $ay !ro*e inade/uate &or lar(er *entures re/uirin( $illions o& dollars
+orth o& &inancin(% Althou(h it can be done, such +as the case +ith Pebble Batches, but it doesn1t
ha!!en o&ten and can be /uite challen(in(% 7erious, established businesses should loo- &or other
$ethods o& &undin(%
Further, so$e co$!anies !ro$ise re!ay$ent in !roduct, as Pebble Batch did% Co+ they ha*e to
!ro*ide thousands o& !eo!le +ith !roduct, distribution has been delayed by $onths, and Pebble &unders
are +onderin( i& they +ill e*er (et their +atches% ;a-in( a !roduct and distributin( it in*ol*es costs%
,t1s easier to $a-e +ire trans&er !ay$ents%
No. ": #ack of prestige.
Bhile it $ay be hi! &or artists and &il$ $a-ers to raise ca!ital in a trendy, technolo(ydri*en +ay,
!ro&essionals includin( !hysicians, la+yers and others li-ely +ould not +ant it to be -no+n that they
!osted their business !lans online in search o& &undin(% Bould a doctor really +ant one o& his !atients
to be a !artial o+ner o& his $edical !racticeD Probably not%
No. $: Negative i!pact on future financing options.
Co$!anies that issue shares throu(h cro+dsourcin( ulti$ately are beholden to lar(e nu$bers o&
unso!histicated in*estors +ho o+n tiny sta-es in the business% .his structure could deter *enture
ca!italists or an(el in*estors leery o& in*estin( in a &ir$ that is o+ned by thousands o& ine'!erienced
shareholders%
No. %: &he value of shares sold to investors during a 1"'!onth period cannot e(ceed )1 !illion.
,& an entre!reneur raises 91 $illion or $ore throu(h e/uity cro+d&undin(, he or she cannot loo- &or
additional &or one year% Other+ise, the business o+ner $ust co$!ly +ith securities re(istration
re/uire$ents% Bhat ha!!ens i& the co$!any e'!eriences ra!id (ro+th and needs $ore $oneyD
No. *: +hat if our project is not ,se(,-
Bhile it $ay be a!!ealin( to artistic$inded in*estors to &und art e'hibitions or docu$entary &il$s,
online su!!ort &or a traditional business1s +or-in( ca!ital needs +ill li-ely be lac-luster% ,n these
instances, co$!anies are better o&& securin( lines o& credit or $erchant cash ad*ances%
No. .: /peed
,& a business o+ner needs a lot o& $oney /uic-ly to ta-e ad*anta(e o& a discount deal on in*entory or
re/uires a ra!id in&usion o& cash &or a buildin( !ro2ect, he $ay not be able to +ait &or the idea to catch
&ire on a cro+d&undin( site% A cash ad*ance or business loan &ro$ a ban- are better o!tions to $a-e it
ha!!en%
No. 7: 0otential lawsuits
,n*estors e'!ect returns and $ay not be !atient i& a co$!any does not (enerate !ro&its% Ea+suits
arisin( &ro$ &ailed business *entures can occur% Plainti&&s $ay accuse the entre!reneur o& &raud, breach
o& contract or $is$ana(e$ent% 7ince only relati*ely s$all a$ounts o& $oney are in*ol*ed, it $ay be
cost !rohibiti*e &or in*estors to !ursue le(al clai$s% 0o+e*er, they can &ile co$!laints re(ulatory
en&orce$ent a(encies that $i(ht lead to (o*ern$ent in*esti(ations% Co business o+ner +ants that
headache%
Bhile cro+d&undin( +or-s &or $any startu!s searchin( &or an alternati*e $eans o& &inancin(, it is not
&or e*eryone% .here are $any instances +hen a traditional s$all business loan or business line o& credit
+ill be 2ust as e&&ecti*e and $uch easier to obtain% .he basic rules o& business still a!!ly% An
entre!reneur see-in( cro+d&undin( still needs to ha*e a sound business !lan, and the s-ills, e$!loyees,
and resources to deli*er on its !ro$ises% ,n*estors, e*en s$all ones, are not (oin( to thro+ their $oney
a+ay on a co$!any +ithout sound business (oals and the ca!ability o& obtainin( the$%
;y ad*ice to anyone considerin( cro+d&undin( is to research all the o!tions a*ailable, includin(
traditional sources o& ca!ital, and then deter$ine +hat +ill be the best deal%
This opinion column was written by Rohit Arora, co-founder and CEO of Biz2Credit, an
online resource that connects small business owners with ,!!" lenders, credit ratin#
a#encies, and ser$ice pro$iders such as C%As and attorneys $ia its &nternet platform'
(ince 2!!), Biz2Credit has secured more than *+!! million in fundin# for thousands of
small businesses across the ,'('