One of the major problems a new startup faces is the financial problem, and it isn’t easy to raise funds in today’s world. Investors are more careful and are analyzing before investing in a particular enterprise. But now there are many options for the entrepreneurs to deal with this problem and raise funds for their startups more easily. Angel investors and crowdfunding are the new ways of raising funds. Angel investors are helping startups in many ways. In contrast, crowdfunding has also played an essential role in raising funds for the fledgling startups, both have their pros and cons, and it’s vital to understand their impact on your startup in the long run. So lets analyse Angel Investing Vs Crowdfunding
Investors with the interest to help the new startups are known as angel investors. And the investment done by them is known as angel investing. This type of investor searches for fledgling startups with some great business plans to invest in it. Many startups with good business plans suffer due to financial problems, and they never get the chance to convert the plan into reality, but angel investors are assisting them in it. The angel investors provide some seed money in exchange for some stakes, which they sell afterward as soon as the company gets profitable. Angel investors usually work independently, but sometimes they include themselves in an investor group known as syndicates.
Crowdfunding is the process of raising funds from a large number of people, and they contribute only a small amount of money to the company. This process is usually carried out online. There are different crowdfunding sites that are helping to connect investors with startups raising funds. Investors do not invest a large amount of money in the case of crowdfunding. Crowdfunding is of two types: reward-based crowdfunding and equity-based crowdfunding. In reward-based crowdfunding, investors get rewards in return for their money. In the case of equity-based investors are offered an equity stake of the company in return for their money.
Let’s discuss the pros and cons of both ways of raising fund: Angel Investing Vs Crowdfunding
Different Than Loan-
Another way to raise funds is to take small business loans from the banks or some financial institutions. In this case, you have to return the money to the bank within a fixed period of time. In addition to that, you also have to pay interest to the bank against the loan. But in the case of angel investing, you don’t need to return the money as the investors are more interested in the increasing value of the company that increases their share value.
Help In The Business Plan-
Angel investors other than providing funds for the company can also help the entrepreneurs design their business plans as these investors have a lot of experience in this field. Some of them even have already owned a startup. Entrepreneurs can take advantage of their expertise to get some good management ideas for the startup.
To put money on startups is extremely risky as no one knows whether they are going to survive the market or not and it is impossible for the startups to get a loan without a robust previous track record whereas the angel investors know the amount of risk there is in funding these startups, but they are willing to do it. investors know that there is some risk for a better future, so they take it
Pressure on startups-
Helping the startups raise funds can be one of the things that an angel investor wants, but they also want to see that the investment they have made is going to have a good return in the future. This can put some pressure on the entrepreneurs while doing business as they think of paying the investors back in the long run.
Giving a part of ownership-
We all know that in return for the money invested by the angel investors, they get offered some percentage of equity shares of the company. With these shares, the entrepreneur is also handing out some percentage of ownership with it, which can be a problem in the future. If the opinions of the entrepreneur and the investor don’t match in the long run, there will be conflicts arising in the business functions.
Share of profit-
The entrepreneur had to give a portion of his profit to the angel investors as a reward of the funds they had invested in the startup. The company has to distribute the profits at the end of the year. Investors also check the financial statement of the company to see that the amount of profit they received is the right amount, and they have not been cheated.
Crowdfunding : Angel Investing Vs Crowdfunding
Doesn’t need to be equity-based-
In crowdfunding, you always don’t have to give your equity shares in exchange for the funds invested by the investors through the crowdfunding platform because crowdfunding has two types of investing, i.e., equity-based and reward-based. In reward-based companies give some rewards against the funds given by the investors. For example, the company can provide the investors with some new products of the company that has not been launched yet. In reward-based investing, the company doesn’t have to share their annual profit with the investors.
Easy to get investors-
In case of angel investors the startups in order to attract them to invest in their company have to prepare a pitch and perform it in front of them in some meetings or so but in crowdfunding the pitch is already uploaded in the crowdfunding site, investors can look into that pitch and make their decision. These platforms also include the sales report, business profiles, business future plans, and financial statements of the companies seeking funds so that the investors can make a proper and healthy decision. Investors can make non-binding pledges on the platform to invest in a company they like.
Marketing of the company-
The startups have to spend a massive amount of money in the marketing department of the company in order to get visibility among the public. Crowdfunding will also help the startups deal with this problem as the business plan of the company is posted on the crowdfunding site and is available to the whole public. They get to create visibility of their company through this.
Investors who like their business plan will spread the word and do the marketing on behalf of the company. It decreases the marketing expenditures of the company.
In a crowdfunding site, your business plan will get a lot of feedback, which will help you redesign your plan every day to attract more investors to invest in your company. Negative feedbacks are the most important as they bring in front the flaws of the business plan, which may cause problems in the future.
Startups can raise a small amount of money from the crowdfunding sites, which will not meet up the company’s needs in the long run. This will force the company to turn towards angel investors and bank loans to bring up the required amount of money in order to continue the smooth running of the business. Companies usually finish the funds raised in the crowdfunding site.
Crowdfunding sites have the intention of connecting investors with the companies raising funds, but they are also doing business so they can’t do it without any revenue coming, they are into this with the primary intention to earn money. Startups that use these crowdfunding startups have to pay 5% to 10% fees to raise funds on these sites. This can be a significant disadvantage of crowdfunding sites because the companies raising funds may not reach their investment target if they have to pay 5% to 10% of their capital raised to the crowdfunding site.
There will be a lot of competition on the crowdfunding site as the sites are very easy to access, there are a lot of startups who have pitched their business plan in this platform with the motive of raising funds for their startup so, there is very less chance that the investor’s attention will come upon your company. So, in order to be unique among all others, the startups have to come up with a very simplified but unique business plan, and they have to present it with proper professionalism.
Companies that are registering themselves in crowdfunding sites are giving a lot of information about their company. They are even sharing their business idea, so there are chances that someone may steal their idea before you file a copyright claim.
Both angel investing and crowdfunding have their advantages and disadvantages. I will suggest companies with high fund requirements and unique business ideas to go for angel investing, and the companies with a small requirement of funds can use crowdfunding. Companies who want the funds to be raised easily and rapidly can also use crowdfunding.