Equity crowdfunding vs. venture capitalism – which is better?

Crowd funding is becoming a popular way to raise capital for a business. It mainly depends on a model of relatively small contributions from a big number of sources. Ideally, it is easier to raise small amounts of money from many people than it is to raise large sums of money from just a few people.

Equity crowd funding gives the investor power to participate in the ownership of the company. Each of the investors gets a share in the company and a part of the profits. That investor will own that percentage until they decide to leave the company.

Types of crowdfunding

Donation crowd funding

This is hosted by sites like GoFundMe and IndieGoGo that have become popular in the US. Most donors give the money without expecting anything in return. Generally, their main goal is to support a genuine idea or a business they believe will yield good results that will benefit the community at large.

Reward-based crowd funding

This involves primitive results that are based on rewards that arise when you get money or something for investment. This method is commonly used on sites like Kick-starter. A T-shirt company offers a limited edition design for investors. A production company might offer free passes to the movie premiere for its investors.

In the debt crowdfunding model-like, the one used on Lending Club-investors give money to the company and receive repayment plus interest in return.

In a case whereby debtors invested in Lending Club-investors, the investors pay the company and receive the payment with interest. Although this sounds more of traditional investment models, the crowdfunding aspect means more investors need less money than traditional investment schemes.

What makes equity crowdfunding different?

There are equity crowdfunding sites like AngelList and EquityNet that are different from other crowdfunding sites. This is because investors provide the company with money for a certain percentage of ownership. In most other cross-financing scenarios, this transaction is very short. An investor receives money and receives interest or interest payment at a specific time.

This placement can be very useful for starters as they have quick access to capital. However, from a legal point of view, this can prove difficult as it allows too many shareholders in your company. Depending on the structure of your business, you might find yourself losing your strength. Getting a many investors are beneficial, but when there are too many cooks in the kitchen, it can get crowded. Moreover, these investors are not likely to be knowledgeable about your business or industry.

Equity crowdfunding attracts money, but this does not necessarily require experience. However, depending on the underlying situation, the acquisition of capital can be a good alternative for venture capitalists and other types of investors.

Before you make a decision whether to invest in crowdfunding ask yourself the following questions:

Are you new in the business?

If you are a first-time entrepreneur or a start-up without a history, you might find it hard to get a helping hand from the traditional investors. Equity crowd sourcing can be a very good way to start because it is easier to get someone to take a risk on the unknown company since they need less money.

What is the reason for the funding?

Equity crowdfunding can be of great help to you especially when you have a specific product or project. Instead of asking for a specific amount of money, run a crowdfunding campaign for a specific expansion product or product campaign. This will attract more investors to your campaign.

How much time do you have?

It requires time to seek venture capitalists that would have an interest in your business. Asking for a large sum of money from one person can be very delicate. You will have to work really extra hard to gain access and be ready to prove you are worth the risk. On the other hand, if you need fewer funds it is easier to convince a large number of people to give you in a short span of time.

How much of your company are you willing to part with?

Equity crowdfunding requires you to give out the percentage of your shareholding to investors. If your company is making a profit, the investors will too. Nevertheless, that division of your company dilutes your ownership into pieces for investors. Before you decide on this process, make a decision on how much of your ownership you want to retain. If you involve too many investors, you might end up losing power in your own company.

In every type of business investment, you need to weigh your options carefully before deciding the type of crowd funding that will work for you. Get in touch with us if you need to gather more information on either equity crowd funding and venture capitalism.