Five Reasons to Avoid Crowdfunding

In the wake of tight credit markets in North America, crowdfunding or crowdsourcing, has quickly become a source of readily available financing to startups, charities or projects. This form of financing is extremely popular with the creative industry such as documentaries, artists and writers.

This new form of financing allows a person to get funding through small contributions from a large group of individuals through an online platform.  The entrepreneur makes an online pitch to a community, which then decides if they want to support the project by giving money towards it.

Raising funds for your small business by crowdfunding has its own set of dangers that can be harmful to your company’s success.  Here are the top five reasons to avoid crowdfunding as a financing option.

Crowdfunding is not meant for large projects.

If you need a million plus dollars to get your business up and running, crowdfunding is probably not the best source for you. Yes, there have been exceptions, but raising the large pool of capital works best with venture capitalists that you can focus on as opposed to the sometimes-scattered approach of crowdfunding. The other thing to consider is repayment. Imagine trying to keep 1,000 investors happy!

Crowdfunding is not sophisticated investing.

There is a kind of hip, underground vibe to crowdfunding. You could kick in a couple of hundred dollars towards an edgy independent film and feel like you’re part of the creative process. However, some professionals might not want to open up their business plans for such wide scrutiny.   

Crowdfunding could impact future investments in your company.

If you're tapping into crowdfunding as source of capital, you want to think about the longevity of your business. A single project can benefit from the financing, but if you've giving up shares in a company that might become extremely successful, those shares could tangle up future investment opportunities. See "The Social Network" for a perfect example of this dynamic playing out with billions at stake!

Crowdfunding has a limit on share values.

The cap with crowdfunding is $1 million. If you manage to raise more than that amount you'll be frozen out of crowdfunding for at least a year unless you want to become involved in security registration compliance. Suppose your company experiences rapid growth? You might be stuck if crowdfunding is your only cash flow source.

Crowdfunding is not a quick option.

If you need cash fast, crowdfunding is not the way to go. Once you place your proposal up on a site you essentially have to wait until it catches "fire." You'll also have to do a lot of your own promotion to drive people to your plan. This process can stretch on for weeks and months. Now consider being approved for a loan from a bank and having the funds by the end of the week. Which works better for your plans? 

Small Caps Lead the Way

Is the global recession behind us? There are as many answers as there are doubts. But, Canadian investors seem to be optimistic about economic recovery, and are displaying their optimism through investments that may be considered slightly risky in uncertain times.

Canadian investment dollars have been flowing into small cap companies. Small cap refers to stocks with lower market capitalization. Small cap companies, (the average capitalization being around C$370 million), took a severe beating in the recession. When the financial world did not come to an end, these stocks bounced back more than others, due to their severe drop.

Lower prices have certainly attracted investors to the small caps. However, true believers in global economic recovery have been willing to take on the larger risk of these stocks, believing that the risk will produce a handsome profit.

This is not to say that all small caps are attractive to investors. The wise investor still must pick carefully. Investment analysts state that small caps in energy, materials, and consumer discretionary sectors are proving to be the most attractive. In fact, energy and materials comprise roughly half the weighting of sectors in the BMO Small Cap Index. The index monitors and rates a portfolio of around 400 companies valued at nearly C$150 billion.

The future is still uncertain. However, investors seem to indicate that there is reason for hope. Several months ago, many economists and investors feared that global economic collapse was on the horizon. Based, though, on recent investment activity, many are beginning to see rays of sunshine on that same horizon.

Incorporate in Canada with CorporationCentre.ca
Click. You're incorporated ®