If you’ve been wracking your brain, trawling the internet, and practising your elevator pitch on everyone who will listen to your idea or read your business plan, in the hopes of finding those elusive angel investors, then there’s a good chance that somewhere along the line, you’ve run into the term ‘crowd funding.’
In this article, we look at what crowd funding is, how it compares to angel investors, and whether it might be an option for your start-up.
What Is Crowd Funding?
Crowd funding, also known as crowd financing, is a method of generating capital that relies on many small investments, rather than one or two large ones.
For instance, if you are seeking R250,000 to start your business, and you choose to raise capital through crowd funding, you might have 25 investors, each putting R10000 into your business idea, rather than one investor who puts in the full amount.
In some cases, crowd funding works as a donation, where the investors don’t expect their money back, but in most, they will either receive their money back (in an investment deal structured like a loan) or they will receive a small share in the company or companies they fund in this way in return for their money.
However, Will Crowd Funding Replace Angel Investors?
Crowd funding may seem like the answer to your prayers, and you might be thinking that abandoning the notion of finding an angel investor altogether is a real possibility. However, there are a few things that you need to bear in mind about crowd sourcing versus angel investment.
First, there is the size of the investment to consider. Many angel investors these days will invest thousands or even hundreds of thousands of dollars in the right business idea. You deal with one person, and the deal follows a similar path to venture capital or traditional funding. When you crowd fund, on the other hand, if you want to raise a lot of capital, you have to wait until dozens, or even hundreds of small investors decide to invest in your idea.
The next thing you should consider, when you are weighing the benefits of crowd funding against an angel investor, is that crowd funding, if you need to raise a large sum of money, will take considerably longer.
It is quite clear, because of the constraints of time, and the size of the investment that you can source using the crowd funding method, that it will probably never replace angel investors in most areas, but that it is a good choice if you need to raise a small amount of capital.
Choosing Between Crowd Funding and Angel Investors
If neither time, nor the size of the investment you are looking for rules out crowd funding as an alternative to angel investors, then you are probably going to need to do a little more thinking about your options.
Crowd funding may be the next big thing in financing a small business, but it is still more trendy than realistic when it comes to financing options.
Consider what your idea is all about – is it a cutting edge, techno savvy, trendy, or hip student project? Or are you looking for capital for a proven industry, even if your idea is innovative?
If you are serious about your business, then it pays to approach serious investors first. So it may be an idea to try angel investors first, and only if you exhaust the possibilities that business angels offer should you consider crowd funding. It is always an option, but there are quicker, better, and some may say easier ways to find the investment you need to get your idea off the ground.