The Power of Crowdfunding vs. Traditional Funding

Have you ever thought about where the money for your business comes from? Many platforms have developed as instruments and enablers of this new manner of financing startup firms in the previous decade, and much has been written and said about equity crowdfunding. Although large VC investment rounds continue to generate headlines, crowdsourcing initiatives are gaining traction in the media. 

Both VC investment and crowdsourcing are appropriate for businesses with solid scaling potential. 

These businesses generally operate in the software, fintech, biotech, Medtech, and gaming industries and have extremely creative business strategies. This is because both funding methods allow them to swiftly obtain cash to achieve rapid development while avoiding the danger of being gobbled up or defeated by competitors with deeper wallets and more endurance. 

To help you explore Equity Crowdfunding as an alternative to traditional Venture Capital investing, we’ve compiled a list of 10 critical distinctions between the two.

1. Business Model Complexity

Crowdfunding is not only a great way to raise money, but it can also help you establish an engaged user base. Traditional funding requires that your business model be well-developed and ready for market entry with financing already in hand. Even if your startup isn’t yet fully formed, the power of crowdfunding could still provide value.

2. Investment Terms

Traditional VC investment is generally less entrepreneur-friendly than equity crowdfunding. Many founders dislike the concept of having to give up board seats, majority ownership, local conditions, and losing priority in certain liquidation situations. Getting funding through equity crowdfunding allows an entrepreneur to raise cash on their terms.

3. Smart Money Or Spectator Investors

Traditional fundraising is at an all-time low. Small to mid-size companies are losing out on the opportunity for growth due to limited investment options. Crowdfunding has become a popular alternative to traditional funding options.

4. Investor mindset and aspiration

Crowdfunding is a largely untapped opportunity for investors and entrepreneurs looking to grow their wealth through investing in businesses. The traditional ways of making money, such as buy-and-hold real estate or stock market investments, carry significant barriers that keep most everyday people from participating. Crowdfunding offers an alternative path where anyone can be an investor. 

This is because of the crowdfunding model, which creates opportunities unavailable to everyday people through traditional means.

5. Marketing approach

In both cases, the marketing strategy is different. We’re talking regarding online and digital marketing with crowdfunding, and we’re talking about employing pay-per-click marketing, mobile marketing campaigns, e-mail explanation teasers, and other digital materials to reach the most significant number of businesses. 

When it comes to VC investment, we’re talking about piquing the interest of the right individuals through business partner introductions or self-introductions, pitch meetings, and networking opportunities.

6. Funding Restrictions

The criteria used by venture capital firms to identify investment targets are frequently more stringent than those used by crowdsourcing platforms. Crowdfunding remains a more flexible investment vehicle than venture capitalists; if your firm is scalable and has a compelling story, the choice to invest will be made by several people rather than just a few, as with VCs.

7. Corporate Culture

When a company prefers to maintain its culture over becoming another “corporate personality,” equity crowdfunding is typically the preferable option, since with numerous investors, none of them has a lot of clouts, and they agreed to your rules in the first place. On the other hand, if you want to mimic the corporate cultures of other businesses that VCs partly built, and if you appreciate the way they advanced such firms, you should raise funding through a VC instead.

8. Equity crowdfunding fees

In terms of absolute, VCs win because they enable the firm to keep all of the money collected instead of crowdfunding platforms, typically taking 5-10 percent of the fundraising round — with most platforms charge a success fee. As you weigh the benefits and drawbacks of each fundraising strategy, you can always consider it a marketing expenditure.

9. Publicity, exposure, and impact

When you sign on with a crowdfunding platform, your project is seen by thousands of people who are passionate about the same things as you. You’ll get valuable feedback and support from these groups that will help improve your product before it goes to market.

10. Valuation Outcomes

The negotiating procedure between founders and crowdfunding investors is similar to that of any other online transaction. The crowdfunding investor has all of the necessary information, and after reading it, they click to invest entirely on your terms. When working with a venture capital firm, the value may not necessarily be on your terms, and VCs may ask for a larger share in your company if they see promise.

We hope this post has assisted you in determining which finance source is best for your business.