Crowdfunding and venture capital are two of the most common ways that entrepreneurs raise seed funding for their startups. Crowdfunding allows you to raise money from a large group of people in exchange for something—usually some sort of product or service—while venture capital is a form of financing that helps companies grow exponentially by providing them with capital upfront. While they're often thought to be competing methods, it's important to remember that they can work well together. With the right planning and strategy, both crowdfunding and venture capital can be used to help your startup grow. This article will explore the differences between crowdfunding and venture capital, so if you're considering one over the other or wondering how they fit together, read on!
Crowdfunding is a method of funding a project, product or venture by raising small amounts of money from a large number of people (the crowd). Crowdfunding has been used to fund business start-ups, creative projects such as independent films or albums, new inventions and charity campaigns.
Crowdfunding can be divided into two main types:
- reward-based crowdfunding;
- equity-based crowdfunding.
In the former, small investors are rewarded for their financial contributions with products or services mentioned in the project's campaign page as well as other rewards depending on the funding goal. In equity-based crowdfunding, entrepreneurs offer investors shares in their company in return for funding.
Venture Capital is a form of financing that involves the investment of money in exchange for equity. Unlike crowdfunding, VCs can be expensive — usually requiring an equity stake in a company in exchange for their funding, but often resulting in rapid growth and expansion.
Venture capital was traditionally only available to large corporations and established businesses, but now it’s becoming increasingly common for small businesses to access it.
While crowdfunding and venture capital can work well in tandem, there are differences between them
- Crowdfunding is a good option for startups who have little to no revenue and are looking to raise money to keep the lights on. If you're trying out an idea with no revenue or traction, crowdfunding might be the best place for your business—and if it's successful, it could help attract the attention of investors. Some companies prefer to raise money from the crowd because it's low-cost and doesn't require a personal pitch to a bunch of investors. It's also more democratic, since anyone can invest in your business if you make your campaign publicly visible.
- Venture capitalists often make larger investments than angels or angel groups do; that means that those funds may not be as accessible to startups that need smaller amounts at first but hope their businesses will grow over time into something worth investing in more heavily down the road. The cost of raising venture capital is high, but it can help companies scale quickly.
Venture capitalists are more likely to invest in companies that are more mature
They are also much less likely to change their minds about an investment decision than a crowdfunder would be. These are companies with a proven business model, such as those with an established customer base or products that have already been developed and tested. It's not uncommon for venture capitalists to invest in companies that already have multiple rounds of funding from other sources, too.
Venture capitalists will also consider how well a company has performed in the past when deciding whether or not to invest. If your company can show steady growth over time, you're probably going to have an easier time finding VC money than if it has had several periods of high growth followed by stagnation.
Crowdfunding investors are motivated by the potential for exponential returns
Crowdfunding is different: while some platforms do focus on startups and others will accept more mature businesses, most crowdfunding sites don't offer investors any equity stake in the projects they fund. This means that they won't pay off as much as venture capital investments can later down the road.
Crowdfunding investors are motivated by the potential for exponential returns. These investors know that there is risk involved in investing in a startup, and they're willing to accept that risk if they think they can get an above average return on their investment. The hope of getting rich quickly is what makes crowdfunding appealing to so many people.
There are many different ways to raise money for your startup, but crowdfunding and venture capital are two of the most popular. Both have their pros and cons, so it's important to know what you're looking for before deciding which route is best for you. For more visit privateequitylist.com/crowdfunding-primer