Venture Capital VS Crowdfunding
You may already know that the terms venture capital and crowdfunding are two distinct terms, but maybe you are unable to tell them apart. For that, we created this article with a comparison of the two terms.
About Venture Capital
Venture capital is finance provided to start-up enterprises with a strong potential for growth in the near future. These investments are typically associated with a high level of risk for investors, which is waved with the possibility of receiving substantial profits. Venture capital holds an aggressive move in the investment decision.
The shareholders in venture capital are often competitive individuals who can endure setbacks. This method also has the potential of earning an enormous gain on some of the money invested. Moreover, investors can recoup their investments in a firm by selling their stock in the business through an initial offering (IPO) or by selling the company to a larger company.
The Advantage of Venture Capital
Businesses that get venture capital funds are granted access to a funding provider’s network of specialists who can guide them in running their business. As a result, the company may be eligible to receive additional tranches of funding at a later point. Either through a primary venture capital fund or by its community of other shareholders.
About Crowdfunding
Crowdfunding is the process of soliciting contributions from a significant number of people or organizations to fund a big project or initiative. Crowdfunders frequently use social media to spread the word about their platform or idea, hoping to persuade everyone else to participate in the fundraising site.
Businesses can seek the necessary capital from those engaged, rather than hoping for an opportunity to present their product idea to a group of investors. In short, the time it takes between having a concept and getting the funding to turn it into a reality is substantially shorter.
The Advantage of Crowdfunding
Crowdfunding has specific advantages. First off, it can become a business’ fastest way to raise funds without requiring fees. It will also give a founder access to feedback and guidance to further improve the product or service. Besides the financial advantage, crowdfunding is a method to test your audience’s reaction to your business or proposal. It is also an alternative way for you to track your progress.
Related: Raising Capital – 6 Ways to Fund Your Startup
Venture Capital VS Crowdfunding: The Difference
While some businesses may find venture capital as the type of funding they need, others may seek crowdfunding. Regardless, let’s investigate the differences between venture capital and crowdfunding from every angle.
1. The Funding Design
A standard venture capital investment comprises a fund managed by a number of partners. They are compensated on an ongoing basis for their work, which is typically 2 percent of the fund’s total size. They also earn between 20 to 25 percent of the business earnings.
On the other hand, numerous individuals join their cash to finance a startup when using a Crowdfunding system. That’s what crowdfunding is all about. Investors in this category often do not get a charge. Instead, they earn rewards when their stocks are sold at a profit.
2. Market Potentials
According to industry standards, most venture capitalists search for deals that will have the capacity to generate revenues with a minimum of $1 billion. The stakes are significant, which is why venture capitalists (VCs) typically invest in businesses with varying degrees of success, such as biotech, electronics, and other sectors.
For crowdfunding, it is possible to create funds for businesses in any field. And there are those traders who aren’t even concerned with making a profit at all. Rather, they contribute since they seek to be a participant in that which is both thrilling and enjoyable at the same time.
3. Line & Pitch
When collecting funds from a venture capital firm, you may expect very accessible contacts with potential investors and partners. So, you can also expect that the funds will be monitored well as how they should be. If something unexpected happens, proper checks will be performed.
On the other hand, crowdfunding is the process of publishing a proposal online on a regulated crowdsourcing platform. In most cases, the company’s founders have no communication with the majority of its investors, if they even know who they are.
4. Governance
Venture capitalists will typically have specific privileges, such as membership on the management board or the power to examine the finances, among other things. Even when searching for new investors and identifying and recruiting business partners, the VC may lend a hand – making the process easier.
However, when it comes to crowdfunding participants, there is typically little engagement in the company. Although investors may not be a direct source of conversation, they can contribute.
5. Engagement & Negotiation
The majority of venture capital transactions entail negotiations over the terms of the investment. This helps to build a more substantial relationship with the investors.
In comparison, working with crowd funders may be simpler and regulated in its operation. Investors typically only have some contract obligations, authorizations, and preferential treatments.
The Bottomline
Whatever works well for your company is determined by the nature of your firm and its objectives. It’s crucial to remember though, that you must look into all of the financial possibilities available before making a decision.
Are you looking for startup funding? Contact us. Peak is an early stage venture capital company.