Getting a business venture up and running is no small feat. And while there are many logistical challenges to starting a business, one of the largest is securing capital. There is no shortage of ways to raise startup capital, but sometimes the traditional avenues aren’t the best routes. In fact, more startups are turning to equity crowdfunding as a new-age way to get their venture off the ground.
What Is Equity Crowdfunding?
Like you might throw a few bucks at a Kickstarter project and get a reward, equity crowdfunding is the same concept on a larger (and smaller) scale.
In a macro sense, you’re raising the capital to get a business running – tens or even hundreds of thousands of dollars. That’s a lot more than a couple thousand for a Kickstarter project. But the pool of investors is usually much smaller – you are, after all, selling shares in a new business. These investors expect a return on investment (ROI). Limiting the number of investors and the amount of equity you sell dictates the trajectory of the company and what happens when it becomes profitable.
In a simple definition, equity crowdfunding is the act of selling shares of a private company.
Why Equity Crowdfunding Over Traditional Means?
Many entrepreneurs are reluctant to sell equity stakes in their upcoming business venture. They feel stakeholders will dilute their vision. But in most cases, this couldn’t be further from the truth. Backers participating in equity crowdfunding share the vision of the entrepreneur and often tend to be hands-off. After all, they’re buying into the business idea – not their own version of the business.
Equity crowdfunding also can come with fewer barriers, as opposed to traditional capital acquisition options:
- Small business loans are great but come with a multitude of paperwork and hoops to jump through. They take time to secure, are subject to scrutiny, and are highly dependent on the individual and less so on the merits of the business’s potential. Needless to say, they’re hard to secure.
- Bootstrapping takes a long time and doesn’t usually amount to enough capital. Many entrepreneurs have some funds to get them started but can’t afford to keep grinding for capital while they’re trying to get a business off the ground.
- Family and friends can be a great source of income, but access to capital through these channels is limited. You also risk awkward conversations and long-term liabilities borrowing from people you know – especially large sums.
- Angel investors are hard to come by and often engaged in their investment. They have a major stake in the business, which means they can insert their opinion and make changes that may not mesh with the entrepreneur. It’s a recipe for friction.
As mentioned, there are plenty of ways to secure financing for an upcoming venture… but there are strings attached to most of them.
Opportunities for Investors
The beauty of equity crowdfunding is that it creates an investment opportunity where there previously wasn’t one. There are always stocks to trade and real estate waiting to be bought. The next great business idea doesn’t come around every day. And when people recognize it for what it is, they’re likely to get in at the ground floor. It’s a win-win. An entrepreneur gets their great idea up and running, and those who supported them in the beginning are rewarded with equity, resulting in a healthy ROI.
Thanks to the rise of the internet and the booming exchange of ideas, equity crowdfunding is more accessible than ever. It means more businesses get funded and more investors diversify their holdings with equity in something that has the ongoing potential to generate profits.
Equity crowdfunding is one of many investment opportunities. You can click on that link to find more or sign up for our free e-letter below. It’s packed with investing insight from experts.