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Business owners wishing to raise funds for their business and having exhausted tapping into personal savings or bank loans have to decide which is the better way to tap into alternative capital raising method– venture capital, or crowdfunding.
There are some similarities between venture capital and crowdfunding, considering that the objective of both methods is to provide funding for the business, or project owner. There are however a number of differences to consider.
- Equity and the level of control
The venture capitalist (VC) will provide funding in exchange for ownership in your company by securing a sizeable stake as equal shareholder. and It can hold the same type of ordinary voting rights shares and will typically want to have a seat on your company’s board of directors.
While this may be a huge advantage if the VC opens up doors for you, something that a Dragon Den would usually do, in most cases the VC representative will want to scrutinise your key decisions.
The crowdfunding (CF) method will be done on your terms – you can issue non-voting but dividend participating shares, or bonds and there is never any talk of giving up a board seat to the CF platform representing investor interests.
- Due diligence
The VC will conduct a much tougher due diligence of your business, including on-site visits and thorough look through on all your business contracts, methodology and other sensitive information even before making an investment.
The CF platform will also conduct due diligence, but it will mostly do with checking your legal status, financial reports, if there are any bankruptcy issues with the company, its directors or shareholders and whether you have the licenses and permits in place to do what you are promising investors.
- Time to market
The VC will take several months and many rounds of discussions, negotiations, and visits even before they commit any funds, whereas the CF platform will conduct its due diligence much faster and take the project to the market in only a couple of months’ time.
- Valuation
The VC will “squeeze” you as much as possible and then more to extract the lowest valuation of your business to maximize its return, whereas the CF will ask for an independent valuation, check, financial ratios, terms of the KIIS, viability of your business and leave it to investors to decide if they wish to invest or not.
- Marketing
The VC investors will be limited to a very narrow group of people whereas a successful CF campaign will provide extra visibility for your business, which is ideal for promotion and marketing purposes.
- Exciting ideas
VC investments are usually in exciting and new age industries whereas CF is ideal for established businesses involved in “boring” industries which nevertheless give a steady return and deliver on their promises.
- Duration
VC investors may stay in as long as they want, since the agreement that they will oblige you to sign will have many clauses to give them maximum leverage and they may also dictate the buyout terms if your company becomes the subject o a takeover bid, whereas in the case of CF investors, you exercise full control and any future exits will be done on your terms, provided you are fair and treat investors correctly.