Which is the Better Source for Startup Capital?
How to get startup capital.
Every budding start-up comes across the same big question as its revenue starts to grow, “Is it time to seek funding from a Venture Capital Firm?” The answer may vary depending on the type of company and the economic conditions surrounding the forecasted growth of the startup. One aspect that every entrepreneur must do is evaluate whether they actually need VC funding or if they should go after the likes of an angel investor, private equity investor and maybe even a business incubator. In recent times, crowdfunding has been all the talk. After all, why would a company elect to give up a percentage of their company when they can simply give away their product to “investors”. The only reason why crowdfunding has not taken over the venture capital world is because the JOBS Act has not yet been approved. Crowdfunding and Venture Capital funding have their positives and negatives and they must be assessed before considering accepting an offer.
Venture Capital vs. Crowdfunding
1. Money, Experience, and Mentoring
a. VC: High
b. Crowdfunding: Low
The biggest takeaway from working with a venture capitalist is the lifetimes worth of experience they bring to the table. It is more than likely that your investors have worked with companies similar to your startup or have ran their own company. Their experiences as successful entrepreneurs becomes an asset to your company as they can provide you with direction, advice, and money that has a continuous flow. If you are interested in scaling your startup, VC funding should be an objective on your company’s roadmap. Crowdfunding on the other hand is a good way to raise capital, but does not come with the same experience and mentorship you will receive from a VC.
2. Networking and Recruiting
a. VC: High
b. Crowdfunding: Low
This is most likely not your investors first time working with a company. They have worked with several successful startups and manage to maintain an extensive list of contacts with top executives and other venture firms they have worked with. They can help you seek funding from other firms and hire skilled executives to help manage your company. If the money and experience was not enough of a reason to work with a VC, the size of their rolodexes should do the trick. Crowdfunding can lead to vast connections within the industry, however those who are investing in your company may be anyone who is interested in using your product. It seems that crowdfunding investors may not always be the best way to network and recruit top management.
3. Shared risk, Big picture, Exit strategy
a. VC: High
b. Crowdfunding: Medium
Risk arises in any business, not just startup companies. The market will not always work in your favor and deals will not always turnout as expected. Investors are there to support you through the rough times that every startup faces, whether through monetary means or reassurance. They are also the masters of focusing on the big picture while making sure to emphasis the present. If a VC has invested in you, it is because they believe in the future growth of your company. Lastly, the exit strategy. Everything must come to an end, and with startups the end may be three or four years down the road. When the day comes, your investors will make sure you are prepared to cash out and start again. Crowdfunding is a bit different. The big picture outlook mainly comes internally as your crowdfunders will not always be around to offer advice. The exit strategy is also the responsibility of upper level management within the company. Risk, however, is shared if the amount of investments needed is reached and the company fails.
Now we will assess the negatives:
1. Exit Strategy
a. VC: High
b. Crowdfunding: Medium
There are some cases where venture capitalists are investing just for the exit, meaning their only priority is to sell the company or take it public. Several VC firms are looking to multiply their returns, but that is business and does not necessarily hurt your bank account. Personal relationships with your investors can sometimes be overshadowed by shareholder returns. When crowdfunding, you have full control of your own destiny. No one will be telling you it’s time to sell out, and if you are in it to cash out, then the decision is ultimately in your hands.
2. Losing Independence
a. VC: Medium
b. Crowdfunding: Low
CEO is just the name you gave yourself when the company started. When signing the dotted line with a venture capitalist, it no longer becomes just your company. VCs will want one or more board seats with the right to veto actions that your company plans to take. Investors may also have the right to fire you or any member of your management team. In terms of crowdfunding, you do not lose any independence. The JOBS Act may change this, but at the moment your startup will continue to be a private company.
Resource for Selecting Venture Capital Firms:
A new resource was recently created by a startup in Santa Barbara called FindTheBest. FindTheBest is an unbiased, data-driven search engine that helps people make quick and informed decisions. They have developed a new tool that helps anyone seeking venture capital funding select the right firm for their startup. This tool allows you to search for and compare firms based on industry focus, fund size, investment stage, etc. It is a highly valuable tool that will help any startup assess the decision to seek VC funding. The resource is interactive and easy to use. Check out to tool here and access the link above:
The Verdict
The negatives and positives of working with venture capital firms or crodwfunding sites should be considered when deciding to seek funding. Is your startup really ready for an exit or a takeover?. The positives in most cases lead to big success in the future. The monetary value and experience VCs bring to a startup help growing companies move in the right direction. Remember, a VC has been there before and they will apply all they know about running a startup to your company. If your goal when deciding to run a startup was to change the world and make money that you never envisioned having, venture capital funding is a step in the right direction. A venture capitalist will help lead you and your team in the right direction and will prove the positives outweigh the negatives. As outlined in this article, it is clear that venture capital is not a dead industry and there is much to benefit from seeking funding from a top firm. Crowdfunding is a hot topic in the startup funding world and is continuing to make waves as the new way to fund a startup. It may not have reached the level of many venture capital firms, but a crowdfunding eclipse may be just around the corner.
Resource for Those Interested in Private Equity Funding
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