Raising capital for a startup can be a difficult and time-consuming process. When it comes to raising money for your company, there are plenty of options for securing funding. Identifying an angel investor can have a ton of benefits for your company’s progress, but crowdfunding is another resource that has become a more popular tool to help new companies prosper.
Both options have their advantages and disadvantages, entrepreneurs must know how both options can impact your business’s long-term success before making a decision.
The Pros and Cons of Choosing an Angel Investor
Angel investors are high-wealth individuals and accredited investors interested in helping foster growth in new companies. They often provide startups with seed money in return for an equity share in the company. Once the company becomes profitable, angel investors can sell their shares for a profit. An average investment ranges from $25,000 to $100,000.
Why choose an angel investor? If you’re having trouble finding financing initially, turning to an angel investor can help give you guidance and a low financial burden. One pro about choosing the angel investment route is that angel funding doesn’t have to be repaid. Angel investors rely on the company’s value increasing over time.
Angel investors can also provide a great deal of moral support. They often have years of professional experience working with new companies to provide direction and expertise on how successful startups have navigated any challenges during the startup phase. Fortunately, angel investors also understand that investing in a company is a gamble as most startups don’t become profitable. While obtaining a bank loan or gaining venture capital from an investor is hard, angel investors understand the risk and are willing to push down the cash and engage with a company they believe can succeed.
Of course, there are some cons to this situation too. Although startups don’t have to pay back the loan, angel investors want a return on investment, so there may be more pressure to succeed. Another factor is that since angels have some equity in the company, founders are relinquishing control of a set percentage of a business’s profits and handing over some control of the decision-making. If conflicts arise concerning the business operations between the founder and angel investor, it can make running the company a hardship.
The Pros and Cons of Crowdfunding
Crowdfunding also offers a slew of benefits. While crowdfunding can be equity-based to attract investors, founders certainly don’t have to give up equity control in their company to raise money. Instead, some crowdfunding users establish a rewards-based system to stimulate funding. For instance, if founders offer a product, they may want to make it available to investors before providing it to the general public.
Crowdfunding can also more easily attract investors. Focusing on angel investors can be a time-consuming process since founders have to pitch their startup concept to them. Crowdfunding streamlines searching for investors by allowing the startup to publish their pitch on their page where a variety of investors can view it. Other platforms provide features that can help a startup meet its fundraising goals.
Additionally, crowdsourcing increases the visibility of your business. Marketing takes a large chunk of a new company’s budget, but a crowdfunding platform helps raise funds in a low-cost way and helps with outreach. If a crowdfunding campaign is funded quickly, it signals that the startup could be a great success and increase the company’s appeal while attracting more investors for the next round of funding.
However, there are a couple of take-aways of crowdfunding to consider. Fundraising on these platforms is not unlimited. Usually, there’s a gap in how much startups can raise on a crowdfunding site. While some companies may need $1 million, others may need more funding. This may require them to combine crowdfunding and finding an angel investor or loan to support the rest of their funding phase. Fees can also be expensive on crowdfunding platforms. While they can help connect startups with investors, they also need to turn a profit too. Startups who use crowdsourcing platforms can expect to pay in the range of 5 to 10 percent in fees to raise the money they need, which can significantly detract from the funding they receive.
If you’re looking to raise large amounts of capital, angel investing could be a great option since startups don’t have to pay that money back like with a loan. However, founders have to be confident in giving over a part of the ownership to the business. With rewards-based crowdfunding provides a workaround to the challenge of relinquishing control to an angel investor, feeds add up and that can be a burden in itself. Ultimately, it’s up to the founder to weigh the loss of equity to the cost, making it more straightforward for a startup to decide which option is best for their vision and goals.