Equity Crowdfunding vs. Angel Capital vs. Venture Capital

 

Equity Crowdfunding vs. Angel Capital vs. Venture Capital: Differentiation of Opportunity

Equity Crowdfunding vs. Angel Funding vs. Venture Capital Funding

Equity Crowdfunding vs. Angel Funding vs. Venture Capital Funding

The immediate challenge of starting a business is raising the necessary capital. An effective entrepreneur must understand the different options available for getting the necessary funding. It becomes important to compare investment possibilities such as Equity Crowdfunding vs. Angel Funding vs. Venture Capital Funding. Each type of funding has perils and rewards.

The most recent and innovative way to fund a startup company is through equity crowdfunding. This type of funding utilizes the internet and social media via equity crowdfunding sites (truCrowd.com) in order to bring together entrepreneurs and investors.  Compared with other crowdfunding methods equity crowdfunding is different because securities are bought and sold: entrepreneur gets investors’ cash in exchange for equity in the company.

In comparison, angel funding occurs when one very wealthy person supports your company with a large contribution.  The Securities and Exchange Commission (SEC) dictates that these investors must have a net worth of $1 million and also make at least $200,000 per year in order to  invest legally. These investors can be found traditionally through Chambers of Commerce or, more recently, through websites.

Venture capitalists invest through a venture capital fund, a group of investors who provide you with third party contributions. Venture capitalists often will provide seed money, an initial investment, to cover start-up costs and then give additional investments over a set period of time.

Equity Crowdfunding vs. Angel Funding vs. Venture Funding: Which is best to fund your business?

It is important to understand which type of funding will best support your needs. When you compare equity crowdfunding with more traditional methods of raising small business capital, such as angel funding and venture capital funding, there are many considerations.

Venture capital investors typically are attracted to companies that are moving out of the startup phase. A company usually must demonstrate some success and growth before a venture capitalist will consider it an appealing investment. Compare that to an angel investor, who may be interested in a brand new business. However, venture capital firms are likely to have specific investment profiles; if your company does not fit that profile, they are unlikely to invest in you. As we continue our comparison, equity crowdfunding puts the idea out to a greater number of people and therefore it leads to more control remaining with the founding team.

One of the most important considerations when comparing equity crowdfunding vs. angel funding vs. venture capital funding would be control of the enterprise. Through equity crowdfunding, each individual investor makes smaller contributions and therefore has fewer shares. This allows the entrepreneur to maintain control of the company.  Compare this to angel investors who can sometimes receive up to 50% of the shares. Similarly, venture capital funds may often draft a business plan, request to be a board member, and require approval on major business decisions in exchange for their investment. In some instances, angel investors and venture capitalist funds control enough of the shares to fire an entrepreneur from the company if they feel that person is hindering business growth. They also often expect that your company go public or sell within 3-7 years of their initial investment. In comparison, utilizing angel funding and capital funding may lead to less control of your origination than equity crowdfunding. Typical investors of equity crowdfunding, by comparison, are less rigid. They expect to hold a share in a successful company but do not have so much invested that they would need to control or manipulate the growth of the enterprise.

Another important consideration is the entrepreneur’s business acumen. What equity crowdsourcing cannot offer as often are professional networking, mentorship, and managerial guidance. Many angel investors and venture capital fund members are experienced either in the fields in which they are investing or experienced in growing new businesses in general. They can provide guidance about how best to utilize the startup funds and often they will require that entrepreneurs utilize their investment in a particular fashion. On the other hand, equity crowdfunding is giving opportunity to a larger number of investors to become the evangelists, beta testers, and devoted users of the products/services they crowdfunded. Sometimes this could be more valuable than the experience that angel and venture capital bring to the start-up.

When comparing equity crowdfunding vs. angel funding vs. capital funding, it is important to know your business. You must have an expected growth plan and understand the needs of your business. If you feel competent and inclined to retain control of your company, then equity crowdfunding is an excellent way to fund the startup. If you need the support and direction of experienced investors and you feel that your company is successful enough to warrant attention, then you may want to seek out angel funding and venture capital funding.

As you see, you assumed that from the availability standpoint, the three financing options are somehow equally available to any startup, but, in reality they are not. Imagine that only .05 percent from all funding requests are funded via angel or venture capital.

What do you think?

Posted in Capital Formation, Equity Crowdfunding, Investors, Start-ups

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