Crowdfunding or Investment: Which is Better for Start-ups?
When it comes to investing in profitable venues, a lot has changed in the recent years. Thanks to the growing popularity of the start-up culture.
Never in the history have there been so many innovative options to raise money for a fresh business idea or fund someone’s medical treatment. Today’s most popular funding options—-crowdfunding and VC investment cut-short the lengthy process of waiting, pitching and knocking doors that are irrelevant to the start-ups.
Crowdfunding platforms like KickStarters, Indiegogo, SeedInvest and Kickfurther not only simplify collection of funds, but also minimize risks for investors that are confidently rooting for start-ups. Concurrently, the trend of entrepreneurs and founders sealing the deal with angel investors, business accelerator programs and professional seed investors are also booming.
But, deciding the better route for funding to get the start-up off the ground requires some actual groundwork and analysis. Founders and entrepreneurs need to weigh down the pro and cons of raising capital for an early-stage start-up through investments and crowdfunding.
Crowdfunding and All That There is to Know About it
An entrepreneur with a great idea for business would require the seed fund and capital for market research, product development, initial operations and other get the product/service to market. Crowdfunding connects the entrepreneur to a network of investors on social media or crowdfunding sites. The investor pool includes anyone —wealthy, not wealthy, high-net-worth or a regular person that is interested in investing in businesses that may or may not take off.
To protect the investors from risks, crowdfunding is restricted by regulations that are similar to the ones which apply to hedge funds.
Crowdfunding platforms make revenue by charging certain percentage as a fee on the fund raised. In the case of investors-based crowdfunds, the funds are offered in return for equity in the start-up. With lenders or debt-based crowdfunding, the entrepreneurs raise capital by agreeing to repay the principal amount and its interest.
With these considerations in mind, an entrepreneur can still opt for crowdfunding if:
The Start-up Can Convince Backers with Unique Product or Service Idea: As long as the idea is unique, original and profitable, the start-ups would be on the right track by convincing backers. This helps in getting more backers to support their crowdfunding campaign.
Founders Hope to Keep 100 Percent Equity: This would be only in the case of reward-based and lender-based crowdfunding campaigns where the entrepreneurs need not give away some control to outsiders and solely manage the business.
Entrepreneurs and Founders Plan to Skip Door-to-door Investor Search: Crowdfunding helps entrepreneurs reach out to a larger segment of investors by sharing their business plan with a compelling video or presentation.
Start-ups can Afford Technical and Marketing Support to Make their Campaign Viral: If start-ups can approach and make use of talent that can devise cogent strategies to increase the awareness of the campaign, attract traffic and make their pitch more appealing, crowdfunding becomes easier.
Founders Have No Problems Adhering the Rules: Many crowdfunding platforms have have different approaches to funding policies, deadline, fundraising goals and may follow ‘all-or-nothing’ rules. As long as entrepreneurs have no objections to wait and comply with the rules, this method would be viable to fund start-ups.
Raising Capital and Seed Money through Private and Angel Investors
Angel investor is a term given to individuals that are interested to investing on a business. It may be a high net-worth individual or a friend, peer, family member or well-wisher of an entrepreneur who wants to financially back-up a start-up during different stages of business.
Raising seed money or capital through an angel investor is a lot easier than a funding received by a VC. That’s because unlike VCs, the angel investors are mainly interested in getting the business on track more than focusing on its profits. Moreover, the angel investors use their personal financial resources to fund business whereas VCs tap into the investors’ pool to raise a managed fund.
Fundraising with investors’ money can pressure start-ups to achieve pre-determined objectives and meet investors’ expectations. Additionally, the start-ups must be willing to part with a certain percentage of equity in exchange for funding. That means, the investors will also have share in the profits and control over the business operations.
Yet, raising money for a start-up through investors is far more sensible because:
Angel Investor Funding is Better than Loans: The interest rates and commitment to regularly pay off the due would be daunting for a business that has opted for a bank loan. It may distract the entrepreneurs from focusing on business and the larger picture.
Angel Investors Extend More Than Financial Support: Investors’ business acumen, expertise, talent and guidance help a business to chart a clear roadmap and meet profit goals without deviating from core philosophy.
Angel Investors Allow Easy Funding for High-risk Start-ups: High-risk businesses have lesser odds of receiving funds from a bank or VCs. Angel investors voluntarily invest in the start-ups that have higher risks to propel its growth.
Investors or Crowdfunding?
Crowdfunding is best suited for start-ups with B2C product/service ideas as it easier to be articulated and understood by the masses who make-up a large chunk of backers in the crowdfunding campaign. This mode of funding is great for start-ups that do not prefer losing control and some level of ownership by handing the equity to the investors. But, the owners may have to make peace with paying off a certain sum as a crowdfunding fee (in case of rewards-based crowdfunding).
On the flipside, investor funding is favourable for start-ups that need a hefty sum to roll-out their business. It also sets the start-ups free from the length planning, applying and waiting for loan approval process.
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