Comparison of Crowdfunding, Angel Investors and Venture Capital

Now that you have created your company, how do you go about funding it? If you haven’t the resources to self-fund and a small business loan isn’t a good option, you might be considering raising capital from an angel investor group, venture capital or crowdfunding.

How do you decide which one of these three will be the best choice for you and your company? Here is a brief explanation of what each of these types of investment capital entails.

Angels can make dreams come true
Angel investors are typically high net worth individuals who invest in early stage companies and startups. After you have put in your own money, and perhaps gotten some funding from friends and family, angel investors are quite often the first “outside” investors in a company. Because they are “first in” they trade the risk of investing in a startup with the reward of receiving more equity.

What it takes to attract venture capital
Venture capital is a popular form of investment capital, but any entrepreneur hoping to raise funding through this method needs to have a good understanding of how venture capital works. Venture capital involves either a venture capital firm or individual venture capitalist (an accredited investor) investing a large sum of money, generally $2 million or more, in exchange for an equity stake in the company. It’s all about taking big risks to gain big rewards, and venture capital firms specifically look for companies that offer an exceptionally large growth opportunity (such as inception to IPO in less than 10 years). This type of opportunity most often exists in the healthcare or technology sector, both of which are extremely competitive and can be very risky. Google, Apple and Facebook are a few venture capital success stories, but there are hundreds of failures for each success.

Equity crowdfunding can fill the void
Equity crowdfunding is the new kid on the block when it comes to raising seed or growth capital for a company. The basics of crowdfunding include a target raise of $1 million or less for the company, and the opportunity will be available for both accredited and non-accredited investors. Additionally, while most angel investing and venture capital deals are made offline, crowdfunding is intrinsically an online investing process, done through a website portal like SterlingFunder. It utilizes the power of social media and the power of the “crowd” to vet the company as a means of mitigating risk for investors. With equity crowdfunding, investors are able to engage in conversations with other investors and the company management team and be actively involved in advising and guiding the new company as well as giving financial support.

Which one is right for your company?
Crowdfunding and angel investors are likely to be used for first round funding, with a second growth stage funding to follow through venture capital. If you have a startup or small business that seeks seed capital, crowdfunding may well provide the funding you need without the connections and time consuming activities needed to access angel investors. Additionally, this is the only one of these three options that will be available to non-accredited investors, thus expanding the funding pool.

While it is never “easy” to raise money for a business, equity crowdfunding promises to make it easier and more efficient for young companies to get off the ground while offering investors a new means of adding diversification to their portfolio.