Early-stage startups often spend much time deciding how best to raise money. Traditionally, startups courted venture capitalists (VCs) in exchange for funds and the investor’s expertise. This way, startups could rely on ‘smart money’, or funds that come with industry expertise. However, finding and building a successful relationship with a venture capitalist takes time and resources that an early-stage startup might not be able to spare. A new kind of method for raising capital has emerged, taking a page out of the sharing economy’s playbook: equity crowdfunding.
What is “Equity Crowdfunding”?
While websites like GoFundMe are popular for letting individuals and companies raise funds for specific products, projects, or causes, equity crowdfunding allows individuals to invest directly in an early-stage startup in exchange for company shares. This process can happen a lot quicker than venture capital outreach, which has made it attractive for startups who wish to grow quickly.
Both equity crowdfunding and VCs are viable methods for raising funds, and each has its own benefits and risks. We’ve decided to outline some of the main differences in each method so that you can decide which is best for your startup.
Which Is Best For Your Startup?
If you don’t have any business or investor connections, then crowdfunding might be your best bet to raise funds. Companies and entrepreneurs with little to no name recognition or network can take advantage of digital equity crowdfunding platforms and raise money from individuals around the world. However, while the process of raising money can be quicker with equity crowdfunding, there are serious intangible benefits to seeking and courting a VC.
VCs are usually competent, experienced individuals who have their own Rolodex of potentially useful contacts. They are seasoned businesspeople, which is an invaluable asset for a company whose team members might not have a ton of industry experience. VCs can also serve as mentors to newer entrepreneurs, who might have a great idea but lack the experience to see it come to life.
For more experienced entrepreneurs, equity crowdfunding might be the better option. If you’re an entrepreneur with a well-developed network and plenty of industry knowledge, then it may be easier to crowdfund your business rather than spend time courting investors.
The sharing economy’s size differs from country to country, and so too does the total number of investors. If you’re an entrepreneur in a country that doesn’t have many VCs interested in the sharing economy, then you may want to utilize equity crowdfunding tools to raise capital. Since the sharing economy is such a relatively new industry, there are plenty of people who are still skeptical or unfamiliar with its underlying concepts.