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Crowdfunding Versus Venture Capital

Crowdfunding vs. Venture Capital

You have got a great business idea and you have a skilled team lined up behind it, and you probably even have a working prototype with feedback. Now, it’s time to raise capital so that you can take your idea to the next level. There are several funding sources and not all of them are created equal. In fact, different funding sources are suitable for different business ideas and entrepreneurs. Crowdfunding and Venture Capital (VC) are two popular options when it comes to raising capital. Following are the key aspects that differentiate them from one another:

Funding Structure

Crowdfunding involves the use of a Reg CF platform where many investors pool their money to fund a startup. These investors normally don’t receive a fee, instead, they get the reward when the stock is sold for a profit. On the other hand, a typical venture capital involves a fund that many partners manage. They receive an ongoing fee for their efforts, which is often 2% of the fund amount. They also receive 20-25% of the profits.

Market Opportunity

The investments in crowdfunding can be really for any kind of industry. And sometimes, some investors aren’t even interested in making money. Instead, they participate because they want to be a part of something that is exciting and fun. VCs, for the most part, look for investments that have the potential hitting estimates of at least $1 billion. The risks are considerable and that’s why, VCs usually look at markets that have high potential for growth, e.g. biotech, technology, etc.

The Pitch

Crowdfunding involves posting a presentation online on the relevant Reg CF platform. In most cases, the founders of the company don’t even have any contact with many of the investors. On the other hand, when you are raising money from a venture capital, you can expect to have several meetings with the partners. If anything goes wrong, there will be due diligence.

Negotiation

Dealing in crowdfunding is straightforward and standardized. However, there are generally a few contractual rights and preferences for the investors. In comparison, most venture capital deals involve extensive negotiation on the terms. Investor agreements can be complicated and long.

Governance

With crowdfunding investors, there is generally very little involvement in the company. However, they may still play their part as a source of word-of-mouth.

VCs on the other hand, will usually require certain rights, e.g. be a part of the board of directors or the right to inspect the books, etc. The partners may even help with seeking new investors and finding and recruiting partners.

Conclusion

These are the key aspects that differentiate Reg CF and venture capital. Keep in mind that these aren’t the only funding sources available. To identify the right option, it is recommended that you learn the differences between the various types of funding and, more importantly, know your comfort level with risk, desire to share ownership of your idea, and ability to take and act on advice and feedback. All money comes with strings. Make sure they are strings you want to and can live with.