Equity Crowdfunding vs. Venture Capital: Which Is Best for Your Startup

Change in the Investment Landscape Today Post-Pandemic

The investment landscape has changed significantly post-pandemic in that VCs are taking fewer risks, meetings and making fewer investments. Some VCs are even taking a step back from all new investments and choosing to distribute capital across their portfolio to keep those startups functioning.


However, another form of funding- equity crowdfunding is getting more popular by the minute and shows no signs of slowing down. Since the pandemic began, companies like StartEngine have reported a steady 4 X increase in the daily amount raised on their platform.

From a geographical perspective, 80% of VC funding goes to companies in the five largest metro locations, in contrast with only 42% of equity crowdfunding. That indicates that equity crowdfunding is a more equitable way of financing companies in all areas of the U.S.

So, which of these is a better option for you? Let’s do an in-depth analysis of both sides of the funding coin to find out.

Objective Look at VC

Pros

Huge Investments – VCs usually have hundreds of millions at their disposal, which means a startup can get a large amount of capital quickly. A venture round is only limited by how much you need and the appetite of the investor.

Experienced Guidance – Since VC funding is a long established form of funding, VCs generally have a wealth of experience guiding and mentoring high-growth companies.

Network Access – VCs often have access to an extensive, strategic network and valuable resources that your business can leverage.

Market Validation – There’s no denying that you get social proof from a successful VC raise, especially if from a reputed firm. It reaffirms trust in your company and eases future partnerships and funding.

Cons

Exclusive Process – Very few select startups find success in raising VC funding. Others invest a lot of time and energy toward something that yields no returns. Moreover, VC money is not handed out unbiased. A huge percentage of VC-backed firms are run by males and white men.

Pressure for Valuation – VCs can significantly pressure companies to increase their valuations and grow fast without focusing on building a lasting and sustainable business.

Control of Funding Terms – VCs seek self-serving terms such as board seats, anti-dilution protections and preferred shares, which can be detrimental to the startup founder. Prepare to invest in legal counsel to comprehend nuances of the contract to push back on such terms.

You Lose Control – Besides giving away equity, startup founders risk handling over sovereignty in management when they raise VC funds. Unless founders keep intact most of the equity or establish super-voting rights, they lose control of their business.

Objective Look at Equity Crowdfunding

Pros

Maintain Control – Companies usually offer non-voting shares via equity crowdfunding. So there’s no change in management or giving up a board seat, which allows startup founders to maintain control over their business.

Inclusive Process – Equity crowdfunding is a more inclusive process that sidesteps biases against POC, women and other marginalized groups.

Brand Ambassadors – Equity crowdfunding allows companies to raise small investments from hundreds or thousands of investors, who then become brand ambassadors of the business.

Exposure/Social Proof – Unlike big name VCs that provide exposure in business circles, a successful equity crowdfunding campaign can mean you have a hold on your market. Public marketing during and after a campaign can boost business exposure in front of customers, hires and partners..

Sales – Companies can boost sales not only through increased visibility, but also by offering investment benefits such as discounts on their offerings for their investors.

Steady Funding – Equity crowdfunding enables startups to always be raising capital, instead of raising huge sums at once.

Grow alongside Fundraising – When raising funds from VCs, you’re essentially in line with hundreds of startups who pitch the same investors. However, with equity crowdfunding, you pitch to hundreds of thousands of your ideal customers and build traction for future growth as you raise.

Build a Community – Equity crowdfunding brings together a community of people who believe in your product and business and are ready to offer up resources such as their network and connections for you to leverage. 

Cons

Risky Campaigns/Fail in Public – While it’s not fun to fail in raising from a VC, at least no one knows about it. However, if a public crowdfunding campaign fails, everyone knows. This can be a huge blow to your credibility and trust in your community. 

Commission on Raised Capital – Funding platforms you use to raise money will cut a commission cheque on the raised capital, anywhere between 5-15%. However, it’s worth noting that you get value in return in the form of a network, mentorship, and support on marketing and legal fronts.

Disclosures – Since equity crowdfunding campaigns are open to the public, all companies must disclose their financials to potential investors, which means they are accessible to everyone.

Costs – There are legal, marketing, accounting and platform-related costs associated with equity crowdfunding campaigns.

Which One is Right for You?

Raising funds from VCs or through a crowdfunding campaign is not exclusive to each other. But startups often go with either. Considering both the formats are so different, you may have made up your mind about what might be best for you.

If you need further assistance devising a strategy, our expert equity crowdfunding consultants can help. At KiwiTech, we have helped hundreds of startups scale new heights through our technology services and funding support. 

LEAVE A COMMENT

We look forward to starting a meaningful conversation!