Venture Capital v/s Crowd Funding

  • 27 January 2018 | 1707 Views | By Mint2Save
Venture Capital vs Crowdfunding

Venture capital and crowd funding: If you are a little aware about the start-up world or even heard about ways of funding your project then you must be aware about these two terms. In this article, we would take a glide of these two popular modern age startup funding methods and look at the pros and cons of each.

Even if not, let’s start with the meaning of these two terms.

What is venture capital? In very simple terms, venture capital is a way of funding your project that involves seeking and attracting professional investors to sponsor your business or project through the selling of private shares of your company, which basically means that in exchange for the high risk assumed by the venture capitalist by investing in your project, the venture capitalists usually get a substantial control over the companies decisions, in addition to a significant portion of the companies ownership. Not to mention, a hefty share of profits for considerable time. 

Now, talking about crowd funding, it is a method of raising funds from the public by listing/expressing your idea on a platform, which is typically the internet. The number of investors could be large or small depending on the amount of their contribution.  

Venture capital is an age-old funding process; on the contrary crowd funding is a newer method to raise finances. While there are differences between crowdfunding and venture capital funding methods, the two share the same common objective, which is, to raise money.

The very next set of questions that comes in our mind now are about which out of two is a better funding method or what are the major differences between the two or which one is beneficial for a fundraiser and in what aspects.

Aspects in which venture capital is better than crowd funding:

  • Mentoring and Assistance: Venture capital is a better source of funding for those start-up’s which are in look out for better mentoring and partnering. As the venture capitalist involves himself in every stage of growth of the project and provides assistance whenever and wherever needed. The venture capitalist has a thorough knowledge about the problems that can be encountered in the progress of the business but with his expertise , he can make the business sail through it easily. When the time comes to talk about numbers, they have a massive skill advantage over company founders who may be complete novices. This help might not be available to a fundraiser raising funds through crowdfunding as they are not in direct touch with the fundraiser.
  • Experience: If you are a young fundraiser with a new idea and looking to partner with some experienced professional, then venture capital is the best option. Not only do venture capitalist help your business steer through the introduction, growth and exit phase but also bring with them a huge network of contact and experience which the fundraiser can’t get in ordinary circumstances.
  • Larger sums of money: If you are looking to acquire larger sums of money, then venture capital funding is definitely a better idea as compared with crowd funding. Larger lump sums of money can be acquired easily through venture capital funding in order to grow and develop quickly since it is easier for businesses to acquire the initial startup resources they need. On the contrary under crowdfunding, you may get a small number of investors investing small amount of money. So, it may even be difficult to handle a large number of investors.
  • Follow-on capacity: If you are looking for follow on investment as the company grows further, then choosing venture capital over crowdfunding is a better option. Then you have quick and easy access to the venture capitalist and if they believe in your ideas they wouldn’t mind investing further. As compared with crowdfunding where it is difficult to raise further investment as it involves a lot of hassles.

Aspects in which crowd funding is better than venture capital:

  • Easy accessibility to potential investors: If you are looking to reach out to the potential investors quickly, crowdfunding is a better option because it puts the decision into the hands of many more people. Many venture capitalists may not like to fund your project if it doesn’t appeal to them, but on the contrary, as crowdfunding involves a large number of investors, thus finding investors is easier under the crowdfunding method.
  • More control over the company to the fundraisers:  One of the biggest advantages of crowdfunding platforms is that they minimize the dilution of control of the company which is in complete contrast to venture capital fund raising as the venture capitalist generally want board seats, control or liquidation preferences and restrictive terms on the founders. So if you are in lookout of keeping substantial control with yourself then crowdfunding is the way to go.
  • Publicity: The deal with the venture capitalist is generally in offline modes or done behind closed doors. But another advantage of crowdfunding that often goes unnoticed is getting introductions to new traders, board members and other partnerships. As the fundraiser puts up his idea on a public forum to attract investors, this also attracts other new consumers or suppliers. It is a free publicity exercise for the project.
  • Informal: Crowdfunding method is a more informal way of raising funds as compared to venture capital.

Crowdfunding platforms and venture capital firms are going neck to neck to seize the growing interest in investing in start-up companies. Competition between crowdfunding enthusiasts and venture capital firms has been fierce in recent years. Which option of financing suits a fundraiser is totally up to them. Before jumping to conclusions about the method of financing that should be opted, a thorough study about the suitability of each should be well studied.

What can be more exciting is to find ways to merge both the options in a way that leads to yielding the benefits of both and overcoming the disadvantages of both. While the risk of introducing a new idea or a project still very much lies on the shoulders of budding entrepreneurs, much of the financial risk can now be dispersed and shared among willing participants and investors who want to invest in ideas and explore the world of new opportunities.

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