Let’s say a company has a new project they’re looking to raise capital for, or a startup is seeking funding to help get them off the ground, what do these companies typically do? The most common form of funding for startups has been through venture capital. However, recently in the past few years, another form of funding has increased in popularity, this method is called crowdfunding. While both are good methods to utilize, it is best to know the difference between the two because one might benefit your project more than the other.
A venture capital is financing that investors provide to startup companies and small businesses with hopes of having long term growth. The funding generally comes from wealthy investors or investment banks. Venture capitalists are typically heavily involved in the venture they choose to invest in, which is one of the biggest differences between venture capital and crowdfunding. Crowdfunding on the other hand is known as a form of collective financing through which the entrepreneur receives the necessary investment for his or her project through the investments of many small contributors. When it comes to choosing between backing your company through venture capital or crowdfunding, you should look at a few defining characteristics.
As previously stated, investors in a venture capital are much more involved in the business strategy than for crowdfunding. Usually, these investors have respectable background in business and managing companies. Therefore, they can provide a great insight for the next steps of the company and direct it down the right path. While in crowdfunding, the investors impact on the project/startup is typically just their investment. Next, venture capitals are typically slightly more stable than those that use crowdfunding. VC’s are able to provide more funding if needed for marketing or operational aspirations. In crowdfunding, a company may realize they require more capital and thus they must wait for the money to be provided. Whereas a VC can go to their investor and explain their desires for more money. Lastly, the friction to get the startup off of the ground is much heavier for VC’s than for crowdfunding companies. Investors in VC’s ask many more questions and spend a greater amount of time to make sure the company is on the right path and doing what it needs. Crowdfunding doesn’t get the same amount of attention and assistance; however, the process begins much quicker.
In essence, if you desire more guidance and require less time for your venture, obtaining funds through venture capital may be the right choice for you. In contrast, if you feel confident in your project and want to start the process as early as possible, crowdfunding may be best for you. Everyone and every project is different, so it’s important to choose the method that fits your needs best.