Traditional Investors vs Crowdfunding: Which is Better?

on Dec 3, 2014
Updated: Oct 10, 2019
When looking for money to start your business, there are many different avenues you can check. Finding investors is a common method for it doesn’t entail the same restrictions and complications that come from bank loans. Thanks to the power of the Internet, traditional investors can be found in a myriad of places. Money can also be raised through the use of crowdfunding. However, which of these two is more likely to help you in the long run?
Finding Investors
There are many websites and businesses that specialize in connecting future entrepreneurs such as yourself with those interested in giving your business money. You could also use your own social contacts to entice someone to invest in your idea. With crowdfunding, you develop a webpage dedicated to your proposal that others can read to determine if your idea merits money. However, the marketing of your idea is mostly left to your own abilities. In order to generate a realistic amount of money to start your business, most ideas need to benefit from an elaborate marketing campaign. In many respects, proper crowdfunding could be more intricate than finding traditional investors.
Driving Interest to Your Project
Many communities have individuals that find value with investing in local start-up companies. People like Rick Schaden could invest in several local businesses as long as the plan is sound and has potential for growth. When it comes to delivering your idea, whether it’s to traditional investors or crowdfunding individuals, you need to have a well developed plan of how you’re going to use the money. Regardless of how you plan on generating the funds to get started, a detailed business plan is going to be your most influential document for driving interest. Although you’re not going to copy and paste the document into crowdfunding sources, it will give you an idea of what you need in order to peak the interest of those with money.
Investor Demands
In most situations, investors will require a certain percentage of your company’s value. This may entitle them to a share of your profits should there be any. Depending on the way the company is set up, it could also give investors the ability to vote on company practices including the hiring of the CEO. It can become quite convoluted if you don’t have all of the legal documents and paperwork straightened. Crowdfunding doesn’t have these complications. In fact, the only requirement for many of these websites is that you reward investors with something that is a tangible byproduct of the business. Some crowdfunding sites don’t even require the reward and view the investment as nothing more than a donation.
The Money Itself
Crowdfunding websites will take a percentage of the money investors give. Some websites will even refund the money to investors if a dollar amount goal hasn’t been reached. Getting the funds you need from crowdfunding sites could take much longer than you’d like while giving away up to eight or nine percent of the proceeds due to fees and credit card processing. However, traditional investors could simply write you a check or hand you the money allowing you to get started immediately.
This isn’t saying that crowdfunding sites should be avoided. These companies have helped many people get inventions and businesses off the ground and functional. However, you should pay close attention to what you’re getting yourself into. It may be more work than you anticipated with a high degree of failure in comparison to finding traditional investors.