Equity Crowdfunding vs. Venture Capital: The Key Differences Every Investor and startups should know

31.07.2018.Bloomio.0 Likes.0 Comments

When it comes to raising finances for startups and companies, the internet has become one of the vital channels for emerging businesses to find the funds they need to grow. To this end, several investment platforms have sprouted on the web that links those who may be interested in gambling economically for their idea in contact with those in charge of new projects.

Before now, startup investment was only a matter for venture capitalist and angel investors. However, equity crowdfunding is currently presented as a powerful alternative with a series of features that differentiate it from other investment vehicles. Statistically, over the last two years, equity crowdfunding has proven to be the next good thing to happen to both investors and entrepreneurs since sliced bread as it provides flexible options that make investing seamless.

One might wonder if VCs still stand a chance against equity crowdfunding, the answer to that question is, YES! VCs have been around for an extended period and would continue to be around for long time. Like I said earlier, the one thing currently creating the buzz around equity crowdfunding is the number of options it has unlocked for both investors and startups which wasn’t provided by its counterpart – VCs.

 

The Key Differences

We discussed how equity crowdfunding differs from the “ordinary” crowdfunding concept in our previous blog post. In this article, we’ll analyze the key differences between Equity Crowdfunding and Venture Capital. Although both of them coexist on the Web and outside of it, their conditions differ and, therefore, it is necessary to distinguish their terms and the factors that characterize them.

  • A difference in investment mechanism & project selection process in startups: while both options are available for companies at different stage, equity crowdfunding is the preferred options for early stage startups. It indeed allows to make one pitch to a multitude of potential investors vs. several pitches to several investors as it is in VC.

Also, in venture capital firms where multiple investors seek high profitability on their investments, projects selection is managed by some core VC partners, but in equity crowdfunding, investors choose which project they wish to invest on from the list of available startups on the crowdfunding platform.

  • A difference in the negotiation period: In equity crowdfunding, the negotiation period and the time available to the startup to demonstrate its viability is limited to favor dynamics operations. However, in venture capital, the negotiation and time can last for months.
  • A difference in the limits of amounts being invested: the minimum amounts allowed to be invested in equity crowdfunding platforms usually lies between $50 and $20000. The reason for this limit is to minimize the risk they assume by diversifying their investment portfolio as well as allowing individual investors to tap into the venture capital arena.
  • Difference in social proof: social proof for both equity crowdfunding and venture capital also varies. In venture capital, startups get social proof from a top VC firm. It shows the ability of the startup to close a mouthwatering deal and also seal partnership deals with high prolific angel investors whereas in equity crowdfunding, raising from the “crowd” already shows that investors trust the startups and that’s more than enough social proof any business will need.

 

CONCLUSION

Whatever investment route an entrepreneur or an investor might decide to go for, these two fundraising (equity crowdfunding & venture capital) platforms have been a great deal of help to the financial, economic, and technological development of today’s world. None should be overlooked. Entrepreneurs or investors might think equity crowdfunding doesn’t offer “smart money” opportunities, well, it does provide smart money opportunities to both investors and entrepreneurs because it is built in a way for VC investors to also invest in equity crowdfunding project, – and it’s a matter of choice. Remember, both platforms are excellent therefore, none should be overlooked.

Categories: Crowdfunding
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