There are many ways you can tap into capital to fuel your company needs; but not all sources are willing or accessible to you.
It is really an issue of the level of risk your company possesses at any given time.
For example, in the beginning you will likely self-fund your company with some savings. As your capital needs grow you might turn to family and friends to support you in funding your passion.
As your company grows some more and the capital needs grow as well you might turn to Angel investors. These are somewhat wealthy people that perhaps you do not know personally but will take a chance and fund you.
Next Venture Capitalists and Institutional funds like Banks these groups might look at your company but only when you have a sale-able product, you have customers and you have an emerging business. They are generally very picky about the companies they take on because they are representing Other People’s Money (OPM) so they have to be very careful.
This where Crowdfunding has emerged.
For companies that do not fit the mold for formal traditional sources of capital such as Angel investors, Banks or VC’s, Crowdfunding taps into wallets of Family, Friend and more importantly Fans.
Fans are the people that don’t know you personally but like what you are doing and want to support you.
Crowdfunding has been referred to as the democratization of capital meaning it directly connects people with money that are not necessarily wealthy – with people who need it. Crowdfunding taps into people’s spare dollars, pounds or pesos and is reinventing finance 10-$1000 at a time.
How equity Crowdfunding differs from reward-based Crowdfunding
First the audience types are different. In reward based Crowdfunding the audience is called a backer or a supporter; whereas in equity CF the audience are called investors.
Secondly, the form of consideration provided is different. A backer receives rewards/incentive or experiences while an investor receive shares or equity in exchange for money.
The main campaign attraction of a campaign for a backer relates to attributes focused on “social good”.
An investor on the other hand is attracted to a campaign if it demonstrates promise and potential that is aligned to the investor’s risk and interest profiles.
The motivation of each audience is also different. A backer is motivated by emotional and contributory factors while an investor is intent on more rational thinking, focused on return on investment objectives usually in double digit multiples.
Finally, marketing an equity crowdfunding campaign has more restrictions placed upon it by securities regulators. This means entrepreneurs must be careful as to how and what they can say about their business and plans. A reward based campaign on the other hand is monitored but does not have such stringent oversight restrictions.
These differences affect how an equity Crowdfunding campaign is marketed.