pros and cons of shared money

Below is a product that has been featured on Kickstarter

Imagine after seeing Podo on Kickstarter, you pledged $89 in donations because you were interested and believed in the potential of the company. If nothing goes wrong, you would be expecting your 2 sets of Podo camera by February 2017 latest. However, things can indeed go wrong and your product may be delayed, or even worse, the company may not have the potential to manufacture any Podo cameras.

In this blog post, we will be looking at some of the pros and cons of using crowdfunding sites to both the funders and the creators.

For creators, they benefit from a lower cost of capital. For early stage ventures, many entrepreneurs may find it expensive to access to capital as they have little operating track record and credibility. However, by posting their ideas on crowdfunding sites, they might be able to gain access to cheaper capital. This is because most of the sites are rewards-based, meaning that they do not charge interest on the loans, but expect the product back in return for their pledge. This poses less risk for the funders. In a traditional loan, the interest would have to be paid even if the project has failed. However, on crowdfunding sites, there is no interest and only the promised delivery of the product. If the production fails, then there is also no binding obligation on the part of the creators to refund the funders.

Creators are also able to access the market situation for the product. When creators put up their ideas on crowdfunding platforms, they are able to see the amount of interest that the public has. This can be seen from the amount of money pledged. The greater the amount of money pledged, the greater the demand. If the initial reception is not that good, the company could choose to stop the project to prevent further losses.

On crowdfunding websites, funders that pledge the projects are usually those who are very interested in the projects. This could be potentially useful for the creators as they can gain feedback and comments from these funders. In certain cases, where funders are able to gain access to the products, they could provide creators with in-depth review of the products.

However, there are also several downsides. First, there is a risk of revealing too much information – Other forms of accessing to capital does not require the creators to reveal too much information about their products. However, when accessing the crowdfunding method, creators will need to disclose their information publicly. For creators who are worried about imitators, this could be a potential problem.

There is also less professional input – In other forms of capital accessing, there will be professional investors involved (venture capitalist and angel investors) that can bring professional insight and relationship access into the business. However, in crowdfunding where the funders involved do not have such skills, there will be less professional input given. 

From the funder’s point of view, they gain an early access to products. In rewards based crowdfunding, the funders will usually provide their products as the rewards. In the event where production is successful, these funders will be the first to receive the products.

Funders also gain access to investment opportunities. This usually refers to companies who are seeking equity investment opportunities, but have hesitations about the creator’s ability. After getting funds from crowdfunding websites and production has started, equity investors can access the credibility of these creators and may provide second-round of equity funding if required. 

Downsides to funders occur when there is an inability of the creator to deliver. On crowdfunding platforms, creators are all over-optimistic about their ideas and only show the potential benefits. However, the risk involved are not shown to the funders, creating information asymmetry. In some cases, there have been many creators who do not deliver the products to the funders, leaving them with lost money.

Hence, we can see both the pros and cons involved to both parties. Although there are positive benefits, it is important that we look at the potential risk involved when using such platforms. This is not meant to be a comprehensive list.