Pros and Cons of Crowdfunding Essay Example
Pros and Cons of Crowdfunding Essay Example

Pros and Cons of Crowdfunding Essay Example

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  • Pages: 6 (1642 words)
  • Published: August 15, 2018
  • Type: Case Study
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Executive Summary

SMEs play a crucial role in emerging economies, contributing up to 40% of the GDP and employing a significant portion of the population. However, securing funding has always been a difficult task for these businesses. Crowd funding has emerged as a promising solution for SMEs in these nations, offering several advantages. It serves as an alternative source of funds when traditional bank loans are inaccessible, aids in marketing the enterprise, allows for maintaining substantial control over the business operations, and provides access to expert guidance.

The drawbacks of crowd funding include the need for additional efforts to generate interest in the project, the risk of not raising enough capital, and the potential for idea duplication through photocopying. Although crowd funding is not radically different from traditional funding sources, it does possess unique characteristics. To effectively secure funds through crowd


funding, one must have thorough planning, a social media strategy, and a supportive team. Emerging markets should establish regulations for crowd funding. Any aspiring entrepreneur who has been excluded from traditional funding options should contemplate crowd funding.


Due to the volatility of emerging markets, banking institutions have strict rules and measures in place that lock out thousands of Small and Medium Enterprises (SMEs) from funding (UN, Department of Economic and Social Affairs. 2007). Multinational institutions that provide finance in these markets typically require collateral for their loans, such as real estate or movable assets like vehicles. However, many SME entrepreneurs do not possess this collateral and thus face financial exclusion.

Governments in developing nations are struggling to find alternate ways to finance SMEs, which make up 40% of their GDP. Crowd funding has emerged as a fantastic solutio

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to this complex problem. Crowd funding involves raising funds for a company through the internet (Dresner, 2014). In economies that rely on mobile money like Mpesa in Kenya (OECD, 2013), the capital is raised through mobile money technology. To obtain funding, businesses must pitch their business plans on a crowd funding website to attract potential investors.

Advantages of crowdfunding

Question 1

There are numerous advantages of using crowd funding as a capital source for an enterprise, including but not limited to:

I. What to do if you are locked out of bank loans

An emerging market, also referred to as an emerging economy or a developing country, lacks comprehensive financial systems. Governments in these markets implement financial policies to stabilize exchange rates for the purpose of promoting steady growth and development. China, for instance, adopts a fixed exchange policy, while other countries adopt flexible policies with occasional government intervention when exchange rates deviate from desired ranges (Armendariz & Morduch, 2010). This is due to the high risks and low returns associated with these markets. As a result, banks require financial and cash flow statements which make it more challenging for start-up businesses to secure loans.

Crowd funding provides an alternative solution for entrepreneurs who cannot obtain funding from traditional sources like banks. Unlike banks, crowd funding does not necessitate the submission of cash flow statements and other financial documents. Instead, entrepreneurs can present their ideas via a well-developed business plan on a crowd funding website and patiently await investors' contributions to kickstart their venture.

II. Assist in marketing the business

When an idea is submitted to the crowd funding platform, it gains exposure to a wide range of individuals, including potential investors

and customers. If the idea is effectively communicated and captures the attention of its audience, there is potential for them to consider investing in it.

According to Niven (2006), investors can become loyal customers and generate revenue for the business, resulting in returns on their investments. Furthermore, these investors also spread information about the business to their friends, thereby contributing to its marketing efforts.

If the platform is tailored to meet the needs of the community, which comprises business moguls, educators, professionals, and students, it has the potential to generate significant interest. The regular usage of this diverse group could result in media attention that would further publicize the platform.

III. Ensuring a strong level of management over the enterprise

Unlike selling equity, crowd funding enables entrepreneurs to maintain control of their business instead of giving up power and control to shareholders. This allows them to achieve long-term investment goals while saving time by avoiding the need for time-consuming decision-making processes that would be necessary if power were relinquished.

IV. Expert guidance is available to you.

The business idea is shared with the business community, allowing individuals within the community to contact and provide expert guidance based on their experience. This collaborative process helps develop more accurate projections for the future of the business, enabling it to reach break-even faster and progress beyond the initial stages of development.

Disadvantages of crowdfunding

However, crowd funding has its drawbacks, as every coin has two sides. The disadvantages of financing through crowd funding include, but are not limited to:

There is a need for additional effort to generate interest in the project.

Raising capital through this approach is not necessarily simpler than raising funds through conventional

means. The entrepreneur must still conduct thorough research on the idea, market, consumer trends, and market.

This implies that the business will still require the same amount of time as it would have for starting. In addition, the Entrepreneur will need to effectively market the idea for funding, starting before the funding commences and continuing until the necessary capital is obtained. This can sometimes involve spending a significant amount of money, which is often scarce for many Entrepreneurs in emerging markets.

ii. Inadequate capital raising

There is no assurance that the entrepreneur will be able to gather enough capital to commence the business. In the event that sufficient capital is not attained, the entrepreneur will need to reimburse the entirety of the raised amount, thus resulting in wasted time and money invested in marketing the idea.

iii. The idea can potentially be photocopied.

Many individuals are not acquainted with the idea of patenting copyrights, leading to situations where an aspiring entrepreneur shares an unpattented idea on a crowd funding website.

The Entrepreneur would face significant consequences if someone were to copy and patent their idea, leading to the loss of their copyrights. This could result in lengthy, exhausting, and expensive legal battles that may be unaffordable for the aspiring entrepreneur. Ultimately, they could lose a business with substantial profit potential.

Crowdfunding features

Question 2

Despite its unique features, crowd funding is similar to traditional business funding in many ways. This similarity is evident in the requirement for a thorough market survey, evaluation, and analysis prior to and during the creation of a business plan. Additionally, the entrepreneur must present the business plan to potential investors and persuade them of its credibility and practicality.


funding has some differences from traditional sources of funding (Borner, 2016). Collateral is not required for entrepreneurs to access funding, unlike banks. The capital is not obtained in a lump sum, unless an angel investor is involved. Additionally, the plan is pitched online instead of in person at a bank or boardroom.

Successful crowdfunding campaigns

Question 3

The success of crowd funding relies on a variety of factors, including but not limited to:

a) Comprehensive planning

To successfully raise capital through crowd funding, it is necessary to conduct a thorough analysis of the market. This analysis will allow the entrepreneur to gradually transition the business and present an idea that is relevant to the specific community. The planning stage also allows the entrepreneur to select the optimal marketing strategy and maximize its effectiveness.

b) Implementing a strategy for social media.

Utilizing social accounts such as Facebook, Twitter, or other platforms is the most effective approach. Around 80% of inventors' target market utilizes Facebook. Engaging promoters who have a substantial number of followers on social media would expedite the entrepreneur's ability to secure the necessary capital in minimal time (Chaffey, 2011).

c) Having a capable team supporting you

It is crucial to have a team that analyzes the progress made. This is because it provides insight into the progress being made and determines if it is satisfactory. The team could consist of journalists who conduct sit-downs. These interviews help to generate interest in the project and increase the chances of raising funds more quickly (Sercu, 2011).


Emerging governments should embrace crowd funding as a way to speed up economic growth and move away from traditional funding methods. To avoid exploitation, the government needs to set

up regulations and registration requirements for the funding source.

In emerging economies, crowd funding is a valuable and sought-after funding source. It is crucial to promote this method in order to provide entrepreneurs who cannot access traditional funding sources with an opportunity to obtain funds. By doing so, the potential for growth and development in these economies would increase, allowing them to be recognized as industrialized nations. Consequently, their currency would have the ability to freely float in the international financial market, strengthening it and reducing fluctuations.


Armendariz, B. and Morduch, J. (2010). The economics of microfinance. Cambridge, Mass: MIT Press.

The book titled "Crowdfunding - A successful Way of New Venture Financing" written by A. Borner was published in 2016 in Hamburg by tredition.

Chaffey, D. (2011). E-business ; e-commerce management : strategy, implementation and practice. Harlow, England New York: Pearson/Financial Times Prentice Hall.

Dresner, S. (2014). Crowdfunding: a guide to raising capital on the internet. Hoboken: Wiley.

Niven, P. (2006). Balanced scorecard step-by-step : maximizing performance and maintaining results. Hoboken, N.J: Wiley.

OECD. (2013). The Internet Economy on the Rise: Progress since the Seoul Declaration. Paris: OECD Publishing.

The book "International Finance: Theory into Practice" was written by P. Sercu in 2011. It was published by Princeton University Press in Princeton.

UN, Department of Economic and Social Affairs (2007) presents a publication titled "Industrial development for the 21st century: sustainable development perspectives" in New York: United Nations.

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