Editor at AngelMatch
These days startup looking for fundraising has never been easier. The vast number of financing options available has made it difficult for most people to know which one is best suited for their company. Knowing where to search for financing based on a company’s stage in the startup lifecycle can help entrepreneurs gain proper funding quicker and save them time on pursuing funding from the wrong place at the wrong time.
Crowdfunding is a method of raising capital through the collective efforts of family, friends, customers and individual investors. This approach allows a founder to connect into a collective effort of a massive pool of individual, mostly online through the help of social media and crowdfunding platforms and leverages their network for greater reach and exposure.
Crowdfunding can be considered the complete opposite of the mainstream approach to business finance. Traditionally, if an entrepreneur wishes to raise capital to begin a business or launch a new product, they would need to pack up a business plan, market research, and prototypes, and then shop the idea around to a limited group or wealthy individuals or institutions. These funding sources are usually banks, angel investors, and venture capital firms, which really limits the options down to a few important players. An entrepreneur can consider this fundraising approach as a funnel, with you and the developed pitch at the wide end and the audience of investors at the closed end. Fail to point that funnel towards the correct investor of the firm during the right time, you’ll lose any hope of gaining money or getting back that wasted time.
On the other hand, Crowdfunding places that funnel on-end. By allowing the entrepreneur to showcase their work on a single platform to build and share your pitch resources, this approach has dramatically streamlined the more traditional method. Normally, you’d have to spend months on end sifting through your personal network, betting any potential investor, and spending your own time and cash to make yourself enticing to them. With the help of crowdfunding, it’s much more simpler for you to get your opportunity in front of more interested parties and give them more ways to help grow your business, from investing thousands in exchange for equity to contributing a sum of cash in exchange for a first-run product or other rewards you can think of.
Types of Crowdfunding
Similar to how there are a variety of capital rounds to raise for businesses in all stages of growth, there are many different types of crowdfunding. Which crowdfunding method you decide upon all comes down on the type of product or service your planning to offer and goals for growth. The three primary types are donation-based, reward-based, and equity crowdfunding.
Generally speaking, this kind of crowdfunding campaign in which there are no financial returns for any of the investors or contributors involved as donation-based crowdfunding. Commonly found donation-based crowdfunding initiatives can include fundraising for disaster relief, charities, nonprofits, or medical help.
Reward-based crowdfunding normally involves individuals contributing to the business in exchange for some kind of “reward,” usually a form of the product or service your company may be offering. Even though this method does offer backers a reward, it’s still generally regarded as a subset of donation-based crowdfunding since there is no financial or equity return. This approach has become one of the more popular options for most crowdfunding platforms, such as Kickstarter, Indiegogo, and Fundable. This is mostly due to how it allows business owners to incentivize their contributors without incurring much extra expense or selling ownership stake.
Differing from its donation based and reward based method, equity-based crowdfunding allows the contributor to becoming part owners of the company by trading capital for equity shares. As equity owners, your investors shall receive a financial return on their investment and ultimately gain a share of the profits in the form of a dividend or distribution.
The Benefits of Crowdfunding
From plugging yourself into a larger net of investor pool to enjoying more flexible fundraising options, there are quite a number of reasons for crowdfunding for the more traditional fundraising methods. Here are several of the many possible advantages:
Reach: By utilizing a crowdfunding platform such as Kickstarter, you’ll gain access to thousands of accredited investors who can watch, interact with, and share your fundraising campaign with others who may be interested in your product/service.
Presentation: By starting up a crowdfunding campaign, you’ll go through the invaluable process of viewing your business from the top level, that being an addressable market, value proposition, history, traction, offerings, and much more. Eventually, this should lead you down towards a more polished and easily viewable package.
PR & Marketing: From the beginning of the launch to the end, you can share and promote your campaign through the help of social media, email newsletters, and other online marketing strategies. As you and any other media outlet cover the progress of the fundraising, you can double down by steering traffic towards your website and any important company resources.
Validation of Concept: Presenting your idea or business to the masses gains you an excellent opportunity to validate and refine your offering. Potential investors start to express their own interest and begin asking questions, you’ll quickly see if there’s anything missing that would entice them even further to likely cash in.
Efficiency: The best part about online crowdfunding is its capability to centralize and streamline your fundraising efforts. By building a single, comprehensive profile to which you can funnel every single prospect and potential investors, you eliminate the need for pursuing each of them individually. Instead of duplicating efforts by printing out documents, compiling them into binders, and manually updating every single one when there’s an update, you can present all of it online in a much more accessible format, leaving you with more time to properly run your company instead of fundraising.
If you don’t have any sort of engaging story to tell, then your crowdfunding bid could become a huge failure. Sites such as Kickstarter don’t allow the money to be collected until the fundraising goal has been successfully reached, so that’s still tons of wasted time that could have been better spent doing other things such as growing the business.
It could become even worse if you do succeed in reaching your goal but then come to the realization that you underestimated how much funding you needed. A business risk getting sued for false promises on customer products or perks in return for donations and proceeds to fail on delivering those promises.
A counter-argument can be made that angel investors and even banks can provide more than just funding. They provide entrepreneurs with much-needed advice. Business owners will completely miss out on such mentorship when they ignore these investors and turn towards crowdfunding.
Funding a Startup With Angel Investors
Usually, an average angel investor is a high net worth individual who has some kind of interesting in helping out startup companies expand their business. These accredited investors provide startups with the necessary seed money in exchange for an equity stake in the company. The idea here is that once the company successfully becomes profitable, the angel investors can sell their shares for a profit.
Angel investors are capable of operating independently or as part of a much larger investment group, which has been dubbed as a syndicate. In terms of how much money angel investors can hand over to a budding entrepreneur, it’s not unusual for a typical investment to range from $25,000 to $100,000. In some instances, angel investors might be willing to park with an even larger sum in order to assist a startup.
Angel funding is not a loan: Taking out a small business loan is another option to fund a startup, although it creates a legal obligation to repay what’s been borrowed. On the other hand, angel investors don’t expect the money to be repaid. Instead, they’re gambling on the company increasing in value as time goes by.
They can provide more than just money: Angel Investors have often established founders themselves and contain years of experience under their belt from working with startups. In addition to providing the financial backing you require to get your business up and running, an angel investor will at times share their own set of expertise, which can become invaluable to the business long-term success.
Angel investors are risk-takers: One of the many unfortunate truth is that the vast majority of startups will eventually end up failing to become sustainable and from an investor perspective, they’re incredibly risky. Without any sort of solid record backing you up, obtaining a bank loan or getting funding through a venture capitalist can be all but impossible. That when an angel investor comes in, they understand the risk with supporting a new upcoming startup, and they’re willing to place their own finances on the line to support a startup’s potential growth.
Pressured into success: While the desire to help out new companies succeed does play behind an angel investors decisions, it’s not the motivator fueling the fire. They also want to ensure their investment pay off in a tangible manner. This can eventually lead towards some heated confrontation on startups to begin generating a solid rate of return.
Angel investors aren’t hands off: As previously mentioned, angel investors receive a certain amount of equity in exchange for providing the much-needed funding to a startup. Not only are you handing over a certain percentage of the company’s future profit but you’re also sacrificing a certain amount of control concerning decision-making. This can lead to some serious problematic situations if conflicts arise concerning the angel investor’s role in business operations.
Angel investing is a good option for any startup to raise vast amounts of funding without being constrained by the requirements that come with taking out a loan. Although, the main disadvantage is the fact that it requires trading off a certain amount of ownership in the company. While crowdfunding does offer a workaround to this unfortunate dilemma, the fees can rapidly pile up. Weighing the loss of equity against cost can make it simpler for startups to decide on which of these options suits them best.