Equity crowdfunding is a form of crowdfunding that allows anyone to invest in startups and other companies. It is an alternative way for founders to raise capital, but it’s not necessarily better than traditional methods like venture capital or bootstrapping.
Typically, equity crowdfunding sites like AngelList or Wefunder offer startups the opportunity to raise funds from the public by selling equity shares of their company. It allows startups to raise money from a large pool of investors, as opposed to relying on a few high-net-worth individuals or venture capitalists. This makes it a more democratic way to raise money and gives more people the opportunity to invest in a company at an early stage.The company sets the price per share and how many shares are available, and people can buy shares online.
The idea behind equity crowdfunding is that it provides opportunities for entrepreneurs who are not able to get access to traditional methods of raising capital, such as venture capitalists or bank loans.
But most recently, equity crowdfunding has been on the rise due to its ability to level the playing field for nontraditional and underestimated founders. Startups build a community of supporters and evangelists. These are people who are passionate about your company and its mission and are interested in helping it grow. Having a strong community of supporters can be helpful in terms of recruiting employees, attracting potential co-founders, getting customer feedback, and spreading the word about your happy startup.
So, is crowdfunding better for startup founders from certain backgrounds? It might not be as effective as venture capital, but it is still a good way for entrepreneurs to raise funds from the general public without giving up any ownership in their startup. Equity crowdfunding can be more accessible for founders of color or who are bootstrapping their companies. This type of financing can be used to solve problems that venture capitalists may not be willing to take on, like solving social problems, which can’t always be monetized. It’s also a good way to avoid pattern-matching that happens in the boardrooms of high-level white-male dominated venture capital firms.
The trade-off is that for founders who are in tech, it’s better to raise money through venture capitalists or angel investors because they can offer more than just capital. They provide mentorship and connections that help the founder grow their company and exit.
The path to capital for the aspiring entrepreneur or founder is just too nuanced to say either way. This is the main reason why your need for capital cannot start and end with money. Other considerations must be considered, like strategic partnerships, mission alignment, and other components that make your business the awesome one it is.
Before you make the dive into equity crowdfunding, ask yourself the following questions: who is in my network? Have I built a community around my product or service? Am I OK with not being profitable for the short-term? What kind of equity can I offer to investors?
It’s important to always keep the reason why you need capital well-defined and explicit.
We’d love to hear your thoughts. So, what’s the verdict? Is an equity crowdfunding campaign appropriate for your startup?