One angel or many? The pros and cons of crowdfunding for capital

Should my company use crowdfunding or venture capital to get our big idea off the ground? It’s a question I hear from many startups these days, and the answer, as you can imagine, depends on what you’re trying to achieve.

If it’s a relatively small amount of capital, it could be that tapping your network of angels, friends and family is enough. The fact is, one type of capital raise is never more or less important than another to a startup – it really depends on what you are looking to get out of it and, like anything else, there are trade-offs.

The power of the crowd

There’s no denying the amazing popularity of crowdfunding right now, with the market share expected to increase by $196 billion from 2020 to 2025 , including a compound annual growth rate of 15 percent.

There are many reasons why it is growing so fast as a source of capital. Startups who choose crowdfunding have more control of their capital raise, and don’t have to give up one or more board seats compared to using venture capital, for one.

There’s also potentially more opportunity, especially now that government rules have increased the limits for how much companies can raise – $5 million for Reg CF and $75 million for Reg A. Crowdfunding is also a great way to build brand awareness and customer loyalty, and for B2C companies, investors and customers are often one and the same.

Crowdfunding lets founders maintain control over their company while simultaneously developing brand ambassadors and reaching new audiences. It also lets companies identify advisors separately from their source of funding.?

Of course, crowdfunding has some pitfalls, too. A big one is that you don’t get the opportunity to directly tell your story in an intimate setting because you are appealing to many people. This can make it harder to effectively communicate your value proposition, so make sure your marketing assets – videos, social media, your website – are dialed in to tell your story clearly.

Adventures in venture capital

Raising from a traditional VC has its own set of pros and cons, and I won’t get into too much detail here since the model is already well established. If your company is looking for connections or advisors, a traditional VC is a no-brainer to cut a big check and provide guidance for your business.

That is, of course, IF you can get the attention and money from a VC. The reality is that very few companies earn VC funding, and those that do often give up significant control of their company (board seats, anti-dilutive protections) in return for the value provided by the VC. I’m not saying this is a good or bad thing, just something to consider.

Unleash the masses, the right way

If you go the crowdfunding route, I’ve learned about some key details that can save you a lot of pain and suffering in the long term. The biggest thing is doing your research and understanding the true demand you expect your campaign to generate. I see it all the time where the funding target is way too aggressive. A campaign that doesn’t generate traction or gives the illusion that it isn’t generating traction is an easy way to scare away would-be investors.

Preparations also must be made to interact with investors. In the same way you would answer all the questions and comments a traditional VC would have during a pitch, you need to be prepared to interact with each of your investors and potential investors. This can be on comment boards, emails, webinars, and social media.

Just because it’s crowdfunding doesn’t mean you can set it and forget it. If you want to engage with your investors, communication is key. You’ll want to provide continuous updates on the business and the campaign, be responsive, create opportunities for engagement through webinars and other interactions, and make sure your pitch is amazing. Finally, make sure you have a handle on your marketing budget. How much are you really willing to spend, and where do you plan on spending it?

The future of crowdfunding

As more and more companies pursue crowdfunding as a source of capital, there’s a risk that the battle for the same pool of investors will become more competitive. I think that’s a good thing though, because it forces companies to refine their stories and communicate them effectively to an increasingly informed audience.

Watching other entrepreneurs and companies achieve success continues to inspire others to break from the traditional mold of capital raising. In fact, at Wavemaker Labs , we offer consulting services to companies that want to pursue crowdfunding raises and have seen demand for these services continue to grow.

From Miso Robotics to Piestro , we’ve already shown how successful crowdfunding can be as a source of capital. With good planning and the right tools, you can effectively market your great idea to the crowd and achieve success too.