Crowdfunding
Crowdfunding, on the other hand, is the process of raising small amounts of capital from a large number of individuals, typically through online platforms. Equity crowdfunding, a specific type of crowdfunding, allows anyone to invest in private companies. It offers more flexibility in terms of the investment and allows entrepreneurs to set their own terms for the investment, retaining more control over the business. It also enables entrepreneurs to reach a wider pool of potential investors, including everyday people who may not have the means to invest with a venture capital firm. However, crowdfunding has lower odds of success compared to venture capital, and there is a higher risk of fraud. With crowdfunding, there is typically little engagement in the company from the investors, and the process is generally faster than raising capital from venture capital firms. Crowdfunding is typically best suited for startups that need to raise smaller amounts of capital
In summary, while venture capital investment involves larger sums of capital from a few investors, strict criteria, and high involvement in the business, crowdfunding allows for smaller investments from a larger pool of investors, more flexibility in terms of the investment, and potentially wider reach, but with lower odds of success and higher risk of fraud.
There are several crowdfunding platforms available for businesses and individuals to raise capital. Some of the best crowdfunding platforms in 2023, according to Investopedia, are:
- Indiegogo: Best overall
- SeedInvest Technology: Best for startups
- Mightycause: Best for nonprofits
Other popular crowdfunding platforms include Kickstarter, GoFundMe, Crowdfunder, and Patreon.
Crowdfunding allows businesses to access capital from a large number of individuals, typically through online platforms. Investors can take small ownership stakes in private businesses that can provide much higher potential returns than public companies. However, crowdfunding comes with its own set of risks, and campaigns are not guaranteed successes. Crowdfunding platforms charge a platform fee, a transaction fee, a payment processing fee, or some combination.
In contrast, venture capital investment involves larger sums of capital from a few investors, strict criteria, and high involvement in the business. VC firms have specific criteria for investment and are highly involved in the businesses they invest in, both financially and operationally. They often require a significant amount of equity in the business in exchange for funding and may have strict conditions for how the entrepreneur can use the funding. VC investors are experienced professionals who make well-informed decisions about which companies to invest in and provide support if needed.
Angel investors
Angel investors are individuals who provide capital to businesses, particularly startups, in exchange for convertible debt or ownership equity. They often support startups at an early stage when the risk of failure is high and most investors are not prepared to back them. Angel investors can invest online through equity crowdfunding or organize themselves into angel groups or networks to share investment capital and provide advice to their portfolio companies. They are typically retired entrepreneurs or executives interested in staying abreast of current developments, mentoring new entrepreneurs, and utilizing their experience and networks on a less than full-time basis. In the United States, angel investors are generally accredited investors to comply with SEC regulations. They are attracted to startups with intriguing ideas and invest their own money to help develop them further. Angel investors seek prospects through online crowdfunding platforms or join networks that pool capital for greater impact. They are welcomed by cash-hungry entrepreneurs who can't get conventional bank loans or don't want the burden of big debt until their ideas take off. Angel investors typically finance a business startup at the very early stages, often when the business might not even have customers or generate any revenue at all. They can bring guidance, networking, and knowledge to the startup company in addition to their capital investment.
