Investing in a start-up is an exciting although risky idea. There are so many crazy and amazing ideas out there. You never know which one will click like Facebook or WhatsApp! But, investing in start-ups requires a lot of money, something that the average investor doesn’t always have, leaving them a bit out of the loop. Instead “business angels” sponsor start-ups, especially in their initial phase. They invest their time and money in the business in return for an equity stake. (Shark Tank, anyone?)
Here’s where Crowdfunding comes in. Here the general public can fund an idea with as high or low amount they want in exchange for a reward. Among the many successful Crowdfunding campaigns is the now million-dollar tech company Oculus.
Equity Crowdfunding gives the investor a share of the company in return for their investment – making investments in fresh ideas open to all. Crowdfunding platforms display ideas ranging from real estate development to breweries to AI technologies. But beware, not only are there many crowdfunding appeals to sort through, but many of these ideas will not work out.
Investor-led vs Entrepreneur-led
As an investor on a crowdfunding platform, spreading your investments across many start-ups will reduce the risk you take on. Investor-led equity crowdfunding pitches already have a lead investor or business angel. This means the business idea has already been evaluated by a larger and stronger investor making it more secure for those of us unable to assess it ourselves.
Entrepreneur-led equity crowdfunding gives the entrepreneur the freedom to set the terms of the deal. The terms can be anything from the lowest investment requirement to the highest return they will give back to you.
As an Entrepreneur…
This is a way to raise capital with low borrowings or sometimes none at all. Crowdfunding will require a strong marketing plan on many digital platforms. Only if the idea reaches and appeals to a wide range of investors, will the money start to come in. Companies looking to make a social impact have an amazing opportunity to create awareness about their cause while committing many people to it.
However, there is always a chance that the campaign will not workout. Even so, crowdfunding allows one to test the waters and tap into the market for the business idea. At the very least, you will leave knowing more about the capability of your idea and the demand for it.
Don’t rule out loans, though. Despite their strict requirements, they help you build business credit and the banks often give personalised advice. But most importantly, you don’t need to give banks a share of your business like in Equity Crowdfunding. The business remains yours.
Crowdfunding is an interesting opportunity for both entrepreneurs and investors. One that allows growth for both parties and often a contribution towards building the society too. And who knows, maybe the next crazy idea you come across is the next big thing!
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