Launching a business today is not nearly as much a hassle as it was a decade ago. Innovative new technologies have unlocked fresh ways to raise money for startups, thus allowing capital to become accessible to innovators who wouldn’t have had access to it before. So now, more than ever, before engaging with potential investors, it behooves an entrepreneur to examine all the pros and cons of the various funding options so readily available. Let’s have a quick look at the “big three” funding options.
Angel Investment or Venture Capital
Why do angels exist? After all, based on sheer definitions, the two are seemingly the same thing. Like venture capitalists, business angels invest in a company’s development in exchange for a better than average return. However, what makes angel investors unique is that besides the appeal of any future ROI, they are usually motivated by altruism— the desire to see new and perhaps innovative businesses get off the ground and succeed. In that spirit, the angel investor will, typically, have a more vested interest to not just provide financial support but also advice and support to the business he or she invested in. In contrast, your average venture capitalists are more motivated by profit — pure and simple — since they’re only looking to invest in businesses that will offer security and a high return on their investments. Thus, it should come as no surprise that angel investors usually invest in smaller ventures, while venture capitalists normally invest a minimum of USD 2 million. Nevertheless, although, venture capital investments reached an all-time high of USD 34 billion in 2Q 2015, there has been a noticeable drop in deals since then in Europe and the USA. Could it be a foreshadowing of the new power of crowdfunding?
The concept of crowdfunding was originally looked down upon by professional investors, who saw it as entirely too idealistic. But according to the research firm Massolution’s annual report, the crowdfunding industry is on a roll: rapidly moving to overtake both venture capital and angel investing by 2016. With an estimated market value of USD 34 billion in 2015, crowdfunding has come a long, long way since its valuation of USD 880 million just five short years ago. So, just what is crowdfunding? And what makes it such a big deal? By definition, crowdfunding is the practice of raising funds from the online community in order to finance any kind of project. Counterintuitively, at least to conventional wisdom, “unconventional” industries – such as music and recording arts, films and performing arts, are not the only industries attracted by crowdfunding. Business and entrepreneurship have remained the most popular crowdfunding category, having collected USD 6.7 billion in 2014, these two sectors represent more than 40% of the global crowdfunding volume. Social causes (USD 3.06 billion) and real estate (USD 1.01 billion) complete the top five categories.
Venture capital funding and angel investing might account for roughly USD 30 billion and USD 20 billion a year, respectively, but the World Bank estimates that crowdfunding will reach USD 90 billion by 2020. That said, if the current trend of doubling year-over-year continues, it may well reach this figure by 2017! A giant new capital market is taking shape before our very eyes, so don’t underestimate the power of the crowd!
Ultimately, angels, venture capitalists, and crowdfunders all give capital in exchange for equity in a business, differing from each other mostly by the amount of stake in the enterprise they are willing to take! So, how much ownership are you willing to give up, and at what price?
Do you believe in crowd power? Share your comments!
Picture above: Courtesy Swarm Store ©