Crowd Sourcing Can Give Startups a False Sense of Security

A day doesn’t pass without news of a new startup that has raised more than they asked for. Yes, Crowd Funding is a viable alternative to Banks and VC’s, but it comes with some subtle dangers!

Some businesses can’t raise funds any other way. The Banks and VC’s won’t touch them. But if the Crowd likes their idea, Bam! – they get funded.  It seems so democratic, so what’s the problem?

Here are some hidden dangers to Crowd Funding that are becoming more apparent to the startups and the Crowd alike:

1. Experience. The Crowd lacks the sales and distribution experience that the Banks and the VC’s have painfully learned from poor investments in great ideas. The Crowd may love the concept, and envision one in every household, but the Crowd generally doesn’t know how to get it to market, run the business, or achieve positive cash flow. Typically, inexperienced startups will write a business plan and get the Crowd to fund it, while experienced business owners know that it’s the cash flow report that leads the business, not the business plan.
2. False Security. The Bank and the VC’s will grill the startup about exactly how the product will get to market and stay there. They will demand a cash flow plan that takes into consideration much more than the merits of the concept itself. Because of the sheer numbers of the Crowd, both the startup and the Crowd itself believe a great idea will be sought out by the market and sales become an afterthought.
3. Management. The Crowd tends to focus on the product and not so much the management of the company. When the Crowd is provided with a sample product in return for their investment, they believe that the startup will be able to manufacture and distribute the product in the future. In reality, it’s the management of the startup that will determine the success or failure of the product.
4. Popular Misconceptions. The Crowd tends to simplify the sales process. They go online or to the store and “everything” is there every day. Their judgement about success in the marketplace is based on what they see from their side of the screen and their side of the retail shelf – as consumers, not as producers. If they don’t see it, they think it hasn’t been done. It may have been done but never made it to their store. This simplistic and popular misconception is reinforced when the Crowd has a positive response to the startup’s offering.
5. Timing. The time between the offering and the actual availability of the product is almost always much longer than expected. The startup discovers the hard way that the costs and time of production and distribution are much greater than they anticipated. This tends to slow them down. Meanwhile, because of all the publicity, companies with more resources and better access to the market can jump on their great idea and be first to market, leaving the startup in the dust. In some cases the startup’s idea becomes outdated by the time it hits the market.

Startups can get a false sense of security after a successful Crowd Funding. It can deaden their ears to unwelcomed news – such as, it’s not so much about the idea, as it is about the management, delivery, and achieving a positive cash flow. It’s not about launching the business or how much is raised. It’s about whether the startup did the homework required for the time to market and true cost of sales – even if the Crowd gives you twice what you asked.