Equity crowdfunding for startups
Today our discussion would be centered on the topic of equity crowdfunding for startups. Naturally, one of the most important aspects of any business, especially an early-stage venture, is capital.
Factors such as competition from other players in the market, general market sentiment and customer behavior, and changes in your business structure bring about long-term volatility in your business.
One thing that cannot withstand such volatility is the amount of capital you have to run your business. Now, the major question that arises is - how does a startup acquire capital? There are four major ways to get capital into your business. These are as follows:
- Through your friends and family
- By means of venture capital or angel investors
- Getting a loan from a bank or financial institutions
- By investing your own savings into the business
However, if we don’t consider equity crowdfunding for startups, the fact of the matter remains that, for a majority of early-stage businesses, it gets difficult to arrange their capital from these four sources because acquiring a capital-size investment from friends or family may not always be feasible.
It is also difficult to obtain funding from venture capitalists and angel investors. As for the third route, early-stage ventures mostly do not have sufficient or freely available assets to put down as collateral for a bank loan.
Lastly, almost all early-stage entrepreneurs do not have abundant cash as their own savings to invest in their businesses. But, there’s no need to get disheartened by this. There are other ways to raise the capital that your business requires!
This is exactly where equity funding steps in for startups! Equity crowdfunding investment has been growing tremendously in the last 2–3 years. Currently, more ventures are opting for the latest and more lucrative equity crowdfunding opportunities.
Equity crowdfunding for startups is one of the ways through which such businesses can raise funds for their capital requirements. Essentially, in the process of equity-based crowdfunding, funds are gathered through a large group of people.
An excellent platform for crowdfunding is Kickstarter where you can create a business plan and upload it on their website. You have to set a financial goal for your business plan and if people believe in your business idea, they can invest in your venture.
Now, we shall learn about the two main forms of equity investment crowdfunding. These are as follows:
Equity crowdfunding for startups by receiving rewards
Rewards are more of a traditional way of crowdfunding. This form of crowdfunding is essentially equity crowdfunding for investors because it’s a system wherein investors get a reward in return for their investment.
For instance, a goodie as a reward to an entrepreneur donating a certain amount of money to your venture can help build a good image of your brand in their minds. While this may be a good way to raise capital, the people who gave money to your business, technically would not be considered as investors in your venture.
The implication this would have is that when your venture earns profits, a reward-based investor would not earn any part from those profits, unlike in other forms of investing. Resultantly, this may, sometimes, cause people to avoid investing in your business.
On the bright side, if the investment amount is not large, this route for equity crowdfunding might be just as beneficial and efficient for startups.
Equity crowdfunding for startups through equity crowdfunding
Coming to the second form of crowdfunding, equity crowdfunding is much more recent and also a very interesting method if you ask us! Under this method of crowdfunding, those who contribute to your business venture end up becoming your business’ shareholders.
Many entrepreneurs have deemed this method to be perfect. With the potential of being a complete game-changer, especially for early-stage entrepreneurs, this method of equity crowdfunding can mean that your friends, family, and other people in your startup’s network can invest small amounts in your business.
This would open up the original four options that were discussed at the beginning of the article. Now, try magnifying these micro-investments across hundreds, and if you’re lucky, even thousands of investors.
You would have sizable funding that has been generated much more efficiently than the other forms of fundraising and in a stable manner as well. These funds can be raised by using email subscription lists, social media platforms, the company, and of course, your friends and family!
So, there you go! Now, you have a basic overview of the 4 traditional methods along with the two roads less taken when it comes to fundraising. We hope that fulfilling your capital requirements is going to be a tad bit easier for you. Happy fundraising!
You can also apply for crowdfunding for your independent business in Dubai with the new amendment issued by Sheikh Mohammed bin Rashid Al Maktoum. However, some specific documents and eligibilities will need to be fulfilled.
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Frequently asked questions
1. How do startups raise funds?
- Startups can raise funds through angel investors, the traditional bank loan methods, and through crowdfunding as well.
2. Why do startups use crowdfunding?
- Startups find crowdfunding a useful technique because they not only help in connecting with a large number of potential investors but ultimately help in raising huge sums of capital as well.
3. Is crowdfunding a good way to raise money?
- Due to the easy-to-use procedures, crowdfunding is an efficient tool to use when a startup needs money on short notice.
4. Do you pay back crowdfunding?
- If loan-based crowdfunding is being carried out, then repayment is required, usually with interest. But, if investment-based crowdfunding is being used, then there’s no need to pay back the investment amount.
5. What do crowdfunding participants get in return?
- Usually, rewards can be offered such as tickets to an event, regular updates, free gifts, and so on.