Angel Investing vs. Crowdfunding: An Overview
Raising capital is one of the biggest challenges any startup can face, but fortunately, entrepreneurs have more than one option for getting the funding they need.Seeking outangel investorshas its advantages, but crowdfunding is redefining how fledgling companies get off the ground.
Funding from angel investing comes from high-net-worth individuals (HNWIs) in exchange for an equity stake in the company. Crowdfunding, on the other hand, allows business owners to raise small amounts of money from a large group of individuals. Both have their pros and cons, and it's important to understand how they can impact your startup's long-term outlook before diving in.
Key Takeaways
- Angel investing and crowdfunding are different ways for startups to raise capital.
- Angel investing involves raising money from angel investors or high-net-worth individuals who generally expect a share of the profits or an equity stake.
- Crowdfunding allows business owners to raise small amounts of money from a large group of individuals through social media or crowdfunding platforms.
- Angel investing does not require repayment but may put more pressure on business owners to succeed.
- Crowdfunding may be easier but the amount of money that can be raised is often capped.
Angel Investing
Angel investing involves raising capital from wealthy individuals who are called angel investors. These individuals generally have an interest in helping new companies expand.They provide startups with seed money in exchange for an equity stake in the company. The idea here is that once the company becomes profitable, the angel investor can sell their shares for a profit.
Angel investors can operate independently or as part of a larger investment group, sometimes known as a syndicate. In terms of how much money angel investors can bring to the table, it's not unusual for a typical investment to range from $25,000 to $100,000. In some instances, angel investors may be willing to part with even larger sums to assist a startup.
These investors are accredited investors. This is a classification set by the Securities and Exchange Commission (SEC) based on their net worth and income. They must also meet certain professional criteria, such as being in good standing with licensing authorities or being an officer in a company that sells securities.
Successful angel investors who invest in multiple ventures are called archangels.
Advantages
- Angelfunding isnot a loan. Taking out a small business loan is another way to fund a startup, but it creates a legal obligation to repay what's borrowed. Angel investors, on the other hand, don't expect the money to be repaid.Instead, they're banking on the company increasing in value over time.
- Angel investors can provide more than just money. Angel investors are often established business owners themselves and they have years of experience working with startups. In addition to providing the financial backing you need to get your venture up and running, angel investors will often share their expertise, which can be invaluable to the business's long-term success.
- Angel investors are risk-takers. An unfortunate truth is that the vast majority of startups will fail to become sustainable and from an investor perspective, they're extremely risky. Without a solid track record, obtaining a bank loan or getting funding through a venture capitalistcan be all but impossible. Angel investors, on the other hand, understand the implied risks, and they're willing to put their own money on the line to support a startup's growth.
Disadvantages
- There may be more pressure to succeed. While the desire to help new businesses succeed plays a part in angel investors' decisions, it's not the only motivator at work. They also want to see their investment pay off in a tangible way. That can turn up the heat on startups to churn out a solid rate of return.
- Angel investors aren't hands-off. As mentioned earlier, angel investors receive a certain amount of equityin exchange for providing funding to a startup. Not only are you handing over a set percentage of the business's future profits but you're also sacrificinga certain amount of control concerning decision-making. That can be problematic if conflicts arise surrounding the angel investor's role in business operations.
Pros
No expectation of repayment
Startups benefit from expertise and capital from angel investors
Angel investors are able to assume startup risk
Cons
There is pressure to succeed
Businesses have to share profit and ownership stake with angel investors
Crowdfunding
Crowdfunding allows business owners to raise small amounts of money from a large group of individuals. Investors can contribute as little as $5 or $10 to the project. When multiple investors contribute a small amount, startup owners can amass thousands or even millions of dollars. Investors may or may not be known to individuals seeking capital.
Capital seekers develop pitches that describe the nature of their startups or projects and go through social media or special crowdfunding platforms like GoFundMe or Kickstarter to ask for money. Unlike angel investing, crowdfunding doesn't promise investors a share of the profits or ownership in the company, although companies may offer rewards for investors who commit a large amount of capital.
There are a few things to keep in mind about crowdfunding, though. The amount capital seekers can raise is capped and some platforms may charge fees based on the amount of money raised, If the goal isn't reached, some sites may also require the money to be returned to investors.
Be sure to do your research before choosing a crowdfunding platform. Fees can range between 0% to 12%, which can eat away at the total amount you raise.
Advantages
- Funding doesn't have to be equity-based. While startups can use equity to attract investors through a crowdfunding platform, it's not always necessary to give up any ownership control in the company to raise capital. Some platforms allow you to use a rewards-based approach to generate funding. For example, if your startup centers on creating a specific product, you may make that product available to your investors before rolling it to out the general public.
- Attracting investors may be easier. Bringing angel investors on board can be a time-consuming process because it typically involves pitching your startup's concept multiple times. Crowdfunding platforms, on the other hand, streamline the process by allowing startups to post their pitch in one spot where it can be viewed by a broad range of investors. In addition to the well-known Kickstarter platform, other crowdfunding websitesoffer features that may be ideal to help your startup reach its fundraising goals.
- Crowdfunding can increase visibility. Marketing can eat up a large part of any startup's budget, but using a crowdfunding platform to raise funds is a low-cost way to spread the word. When a crowdfunding campaign is funded relatively quickly, it sends the message that the startup is one to watch. That can increase the brand's visibility and help to attract additional investors for subsequent funding rounds.
Disadvantages
- Fundraising is not unlimited. While $1 million may seem like a substantial amount of money, it may not go very far for some startups. Companies that require more funding may have to turn to angel investors or loansto fill the gap once they've exhausted the crowdfunding cap.
- Fees can be expensive. Crowdfunding platforms are focused on connecting investors with startups, but they're also in business to make money. Startups who use these platforms can expect to pay anywhere from 5% to 10% in fees to raise the money they need, which can detract from the amount of capital they have available.
Pros
Business owners don't have to sacrifice equity
Easier to attract investors
Increases visibility
Cons
Caps on fundraising
Platforms may charge fees
Are Angel Investing and Crowdfunding the Same Thing?
No, angel investing and crowdfunding aren't the same thing. Angel investing involves raising capital from high-net-worth-individuals who normally want to share in the success of the company through profits and an equity stake. Crowdfunding, on the other hand, means raising small amounts of money from a large group of individuals, many of whom may not be known to the capital seeker(s).
What Are the Best Ways to Attract Angel Investors?
The first place to look for angel investors is to approach your family and friends. They may be able to give you a great deal of capital to get your idea off the ground.
Be sure to do your research and know your business plan inside-out. Nothing impresses would-be investors (especially people you don't know) more than being prepared. If you're able to answer a potential investor's questions without any issues, you may be able to count on them for financial backing.
Networking also helps. You'll be able to get your idea out and drum up enthusiasm about your project as you meet more people.
Do I Have to Pay Back Crowdfunding Investors?
Most crowdfunding platforms don't require that you pay back your investors. You may have to, though, if you don't reach your crowdfunding goal. That's because some platforms require you to reach your goal in order to access the funds.
The Bottom Line
Angel investing is a good option for startups to raise large amounts of capital without being constrained by the requirements that go along with taking out a loan. The main disadvantage, however, is the fact that it requires trading off a certain amount of ownership in the company. While rewards-based crowdfunding offers a work-around to that dilemma, the fees can quickly add up. Weighing the loss of equity against cost can make it easier for startups to decide which option is best.
