Funding your startup is one of the hardest things you must do as a founder. You likely haven’t recently won the lottery or are independently wealthy. You may have some savings to put towards your dreams but will have to access other funding sources for your business.
You never want to put all your eggs in one basket- and the same is valid for funding strategies for your business. Diversifying your financing sources gives you a better chance of getting the appropriate financing that meets your needs. Showing investors that you’ve sought or used various financing alternatives demonstrates that you’re a proactive entrepreneur.
You may access various sources of capital as a founder, each with its demands. This blog post will look more in-depth at angel investing vs. crowdfunding.
Angel Investors are typically formally educated, high-net-worth individuals who invest personal funds at arm’s length in businesses owned and operated by unrelated individuals. Angels tend to finance the early stages of the business with investments of $25,000 to $100,000. Personal funds are invested long- term in exchange for repayable or convertible debt or equity in the company.
Equity Crowdfunding is where a new business or startup raises money by selling many small stakes, usually in the form of shares, to many investors. This is an investment into a business. In return for investing in your business, supporters will receive equity, albeit with less liquidity than what you would get with public stocks.
Kickstarter is not equity crowdfunding. Rather, Kickstarter is a platform for rewards-based crowdfunding, where a company sets a fundraising target and asks for donations—in exchange for some token or receipt of the eventual product or service to be developed.
Equity crowdfunding is available to everyday (retail) investors in Ontario as of January 25, 2016. A few platforms, like FrontFundr or Equivesto, offer this service to startups. Crowdfunding differs from the more conventional practice of raising money through angel investors or venture capitalists, where a handful of actors inject more significant sums into your business.
Considerations for Choosing Between Crowdfunding and Angel Investing
- Funding Needs:
· Evaluate the amount of capital your startup requires. Crowdfunding suits smaller funding needs, while angel investing can provide larger capital injections.
2. Stage of Your Startup:
· Consider the stage of your startup. Crowdfunding is often ideal for early-stage projects seeking validation and market testing. Angel investors are more interested in ventures with a proven concept or some traction.
3. Investor Influence and Control:
· If maintaining control is crucial, crowdfunding might be the preferred choice. With many small investors, your influence over decision-making remains more centralized. On the other hand, while potentially providing valuable guidance, angel investors may seek a more considerable say in strategic decisions.
4. Expertise and Mentorship:
· Assess whether your startup would benefit from more than just funds. Angel investors can offer valuable mentorship if you’re looking for hands-on guidance, connections, and industry expertise.
5. Time and Effort:
· Both options demand time and effort. Crowdfunding campaigns can be resource-intensive in terms of marketing and community engagement. Angel investors, while potentially providing faster decisions, require dedicated time for pitching and relationship-building.
6. Costs and Legal Considerations:
· Understand the costs associated with each funding method. Crowdfunding campaigns may involve marketing expenses while engaging with angel investors might require legal and due diligence costs. There is always a cost to capital.
Other Funding Options
Outside of angel investing, you have other options for funding your business, including your own investment. Investors may ask if you “have skin in the game” as a founder. This is their way of asking if you, as the founder of the business, have incurred risk, monetary or otherwise, by being involved in the business.
Other options for funding your business may include friends and friends, otherwise referred to as “love money.” This is money loaned or invested by a spouse, parents, family, or friends.
You may also access capital for your business through seed-stage venture capital funds, grants & subsidies, or access funding or services through an incubator or accelerator. You can access bank loans or lines of credit to get your business off the ground.
Research your options and talk with your fellow founders or business advisors before making final decisions. Whether you opt for an angel investor, crowdfunding campaign, bank loan, or business incubator, each source has specific demands.
There are pros and cons to each choice you make for your business. It is essential to align your funding strategy with your startup’s unique needs, goals, and the nature of your industry. Remember that the decision is not binary, and a hybrid approach may be the key to unlocking the right blend of funds, mentorship, and community support for your entrepreneurial journey.
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