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How Equity Crowdfunding is Revolutionizing the Way Startups Raise Money?

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November 16th, 2022 14:03

Introduction

It is no secret that capital for a business sows the seeds for it to grow and expand. Raising financing is not merely restricted to enriching from a monetary perspective. It involves other significant advantages- networking, knowledge, expertise, and supplies. 

There are various ways in which a business raises capital. It, for instanceincludes borrowing money from banks, financial institutions, or friends or relatives and re-investing previous profits. 

However, to establish a start-up, some of these capital-raising methods may not be as useful because of the nascent stage a startup finds itself. At this crossroads, you can appreciate the role of crowdfunding as a method of capital raising for startups.

Types of crowdfunding

  1. Donation crowdfunding
  2. Reward crowdfunding
  3. Peer-to-peer lending
  4. Equity crowdfunding 

The first two are community crowdfunding, whereas the last two are return-on-investment crowdfunding.

Raising money for a business is usually organized through private equity, angel investors, or loan agreements with a financial institution. When a product or enterprise becomes commercially viable, the issue of public equity arises. 

However, equity crowdfunding gives an option for startup owners to start crowdfunding at an earlier stage. This medium is increasingly being utilized by growing and small businesses. 

Equity crowdfunding is the process of generating funds from the public by selling securities. Private enterprises can raise funds by selling securities to many people.

It takes a detour from traditional investment methods. Earlier, investment in businesses was limited to venture capitalists and other big investors. However, equity crowdfunding allows investing in smaller amounts. 

It provides easy access to capital due to the outreach to a wide audience. It is fair to say that equity crowdfunding is revolutionizing the way startups are raising money. Below mentioned are a few of the benefits that this method of capital raising provides to startups:

Easy Capital Access

One of the most efficient ways to gather funds for a startup is through equity crowdfunding. It connects startups with thousands of investors eager to make smaller investments in their businesses. They receive a share of the company in proportion to their investment. When compared to traditional capital raising choices, this strategy makes it easier to raise money for small businesses.

More Control

Using this type of capital raising, the ownership proportion of the company's stock is well balanced. 

Equity crowdfunding allows the company's owner to maintain control. In this manner, no single investor has a significant role in management. Hence, entrepreneurs can retain equity in their companies this way. 

Publicity of the Business

Choosing this strategy increases public knowledge of the company. A good marketing plan is required for a successful equity crowdfunding campaign. It tells the public about the founder's reputation as well as the company's history.

Networking

To raise funds through crowdfunding, social networking and capital raising are crucial. An active social network increases the likelihood of business success, and equity crowdfunding aids in its expansion. Connecting with several investors strengthens the entrepreneurial network.

Cost-Efficient Method

Entrepreneurs may be able to raise funds at a lower cost via equity crowdsourcing than through traditional finance channels. In this approach, businesses can raise funds at a cheaper cost of capital without lengthy formalities.

Conclusion

Amidst jotting down the pros of equity crowdfunding, one thing to be kept in mind is that the companies seeking crowdfunding do not have a proven track record. As a result, the issuer must route the crowdsourcing through recognized platforms to appear respectable and legitimate. Therefore, it becomes essential to perform diligent research and market study and to strategize the business. 

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