The new platforms and technologies that exist nowadays have given entrepreneur and start-up owners new ways of funding their businesses. There are three major options for those who want to transform their ideas into successful businesses: angel investors, venture capital investing (VC) and crowdfunding. In this article we will take a close look at crowdfunding and venture capital and hopefully you will be able to decide which works best for your business idea.
Crowdfunding is not only a great way to raise money for a start-up but also a great way to pre-sell a product or service and to get feedback from the customers. Crowdfunding is great for businesses that are creative and that plan to launch innovative products or services. Kickstarter and Indiegogo are two well-known platforms that allow entrepreneurs to sell their products or services directly to their public.
One of the benefits of using crowdfunding to raise money for your business idea is that you raise capital without having shareholders however, in order to get money, you have to be able to deliver something to the public whereas VC provides investments up front giving you the opportunity to deliver the products to the customers later on in the game.
Another advantage of crowdfunding is that you get to test the market and see if your business idea is viable or not. Receiving feedback from the public can help you build successful business and marketing plans. What you have to keep in mind if you choose crowdfunding is that those who contribute to start-ups on crowdfunding platforms are usually early adopters and the buying behavior “in the real world” can be completely different.
You should also keep in mind that in order to reach your goal on a crowdfunding platform, you have to develop a strong marketing strategy and to invest some money in promoting your campaign. On the plus side is that a successful crowdfunding campaign can lead to more funding from angel investors or venture capitalists since you have the proof that there is a marketplace for your product or service.
Venture Capital Investing
Venture capital investing is probably the most well-known way of raising money for a new business. The first and most important thing business owners need to do before pitching their ideas to investors is setting up realistic expectations. There are numerous benefits a business can obtain from VC, besides money, including media exposure, access to experts and portfolio benefits. You won’t be able to get these benefits from crowdfunding so if you are at the beginning and you feel like you need guidance and someone willing to help you evolve and grow, VC is probably a better idea for you. The main role of venture capitalists is to make your company profitable since this will bring money to their firm.
One other aspect we have to mention is that VC allows you access to the venture capitalists’ network where you can find clients and employees for your business.
There are numerous benefits for VC as you can see however, risk is also involved. Some entrepreneurs tend to overvalue their company’s potential and things can become very stressful if the timeframe for the return of investment is not respected.
Every start-up is different and requires different things and every entrepreneur should take those needs into account before deciding between these two methods of raising money. Writing a business plan and creating a great pitch are important steps for both these two methods of raising money so be sure you work on that before creating a crowdfunding campaign or getting in touch with venture capitalists.