Even though raising funds from your future customers seems like a dream, in reality, a successful crowdfunding campaign is very hard to achieve. Angel investors provide approximately four times more capital to businesses than crowdfunding campaigns. What makes this even more discouraging is the fact that self-funding (bootstrapping) dwarfs both angels and crowdfunding campaigns.
Fundraising could be very challenging, so before you decide whether to go to your future customers or to startup investors for the money you need for your new business, you need to consider the pros and cons of both options.
Pros Of Crowdfunding
One of the biggest benefits is that crowdfunding doesn’t have to be equity-based. Often, the word crowdfunding is a misnomer, because the most popular crowdfunding campaigns (e.g. on Kickstarter) are in reality presales campaigns. The people giving you money are your customers, rather than investors.
This is great for two reasons. First, it means you won’t dilute your share in the business. This is not only great because you retain a larger percentage of the profits, but also because you retain control. Second, the success of such a presales crowdfunding campaign is a good way to validate your idea and it indicates that you are moving towards the ever-important product-market fit.
Equity crowdfunding campaigns don’t have the benefit of zero dilution, but they have another benefit. A person who participates in your equity crowdfunding campaign becomes both a customer and an investor. In other words, you combine two usually distinct types of startup stakeholders. These people become very invested in your business and have a high chance of becoming brand ambassadors. Having such people can help you a great deal with early growth.
Cons Of Crowdfunding
The presale type of crowdfunding campaign is usually capital intensive. You have to produce a working prototype, and you have to produce high-quality marketing material. Then, you have to invest in a promotional campaign in order to reach a large enough audience. It’s not a coincidence that you can see Kickstarter campaign ads on YouTube quite often – startups invest considerable sums of money in digital marketing in order to help their campaign gain enough traction.
This to an extent makes it impossible to run such a campaign in the very early stages of your venture. Often, you’ll have to find another initial source of capital before you can reach a stage of your business that can afford to run a proper crowdfunding campaign.
Pros Of Angel Investors
The biggest benefit of having an angel investor is that such a person can be invaluable for your business even outside of the funds they bring to the table.
First, angels are often successful entrepreneurs themselves, which means they are in the perfect position to give you advice. This could be invaluable to a first-time entrepreneur.
Second, they can give you valuable connections that you can use to hire, find partners, or raise further rounds of funding if you require it.
Cons Of Angel Investors
Besides the fact that angels are hard to get before your business has convincing traction (and a mandatory super high upside potential), the biggest drawback of angels is the dilution combined with the loss of control.
Angels (especially if they are heavily invested in the business) could push your business in a direction you are not comfortable with. Because of this, having a high-stakes angel is like having a mini co-founder, which means you need to make sure the investor and the founders have compatible views and expectations.
- Go for crowdfunding if you have a working prototype and enough capital (or a large enough audience) to give your campaign the needed initial traction.
- Go for angel investors if you think you would benefit from mentorship and connections and if you have the right kind of scalable business to attract angels.