How to Get Funding for Your Startup: Crowdfunding vs Angel Investors
You have a brilliant idea for a startup, but you need money to make it happen. How do you raise funds for your business? Two popular options are crowdfunding and angel investors. But what are they, and how do they work? Let’s find out.
What is crowdfunding?
Crowdfunding is a way to finance your business through loans, donations or exchanging money for rewards or shares in your business. You generally do this through a crowdfunding website. To begin, you’ll need to post your business idea (as a campaign) on the website.
Some benefits of crowdfunding are:
– You can reach a large number of potential backers who are interested in your product or service.
– You can test the market demand and validate your idea before launching it.
– You can get feedback and build a loyal community around your brand.
Some challenges of crowdfunding are:
– You need to have a working prototype and a compelling story to attract backers.
– You need to invest time and money in creating and marketing your campaign.
– You need to deliver on your promises and rewards, which may incur additional costs and risks.
What are angel investors?
Angel investors are wealthy individuals who invest their own money in early-stage startups in exchange for equity or convertible debt. They usually offer more than just money; they also provide mentorship, connections and advice to help you grow your business.
Some benefits of angel investors are:
– You can get access to large amounts of capital without giving up too much control of your business.
– You can leverage the expertise and network of your investors to gain credibility and opportunities.
– You can benefit from the guidance and feedback of your investors who have experience in your industry.
Some challenges of angel investors are:
– You need to have a scalable and innovative business model that can generate high returns for your investors.
– You need to pitch your idea effectively and convince your investors that you have the potential and the passion to succeed.
– You need to manage the expectations and relationships of your investors who may have different goals and opinions than you.
How to find crowdfunding or angel investors?
There are many ways to find crowdfunding or angel investors for your startup. Here are some tips:
– Get involved with angel groups and angel investment networks. These are organizations that connect entrepreneurs with investors who share similar interests and goals.
– Attract interest to your business on social media. Social media is an often underappreciated tool for securing angel investment. You can use it to showcase your product, share your story and engage with potential backers and investors.
– Attend networking events¹. Networking events are great places to meet people who can help you with your fundraising. You can pitch your idea, get feedback and build relationships with potential backers and investors.
– Compete in startup events and pitch competitions. Startup events and pitch competitions are opportunities to showcase your product, get exposure and win prizes. You can also meet other entrepreneurs, mentors and investors who can support you on your journey.
– Talk with fellow founders. Fellow founders can be valuable sources of information, advice and referrals. They can share their experiences, challenges and successes with you, and introduce you to their contacts who may be interested in investing in your startup.
Crowdfunding vs Angel Investors: Which one is right for you?
There is no definitive answer to this question. It depends on many factors, such as:
– The stage of your startup: Crowdfunding is more suitable for startups that have a working prototype and enough capital (or a large enough audience) to give their campaign the needed initial traction. Angel investors are more suitable for startups that have a proven product-market fit and a clear growth strategy.
– The type of funding you need: Crowdfunding is more flexible in terms of the amount and type of funding you can raise. You can choose between loans, donations, rewards or equity-based crowdfunding. Angel investors usually offer equity or convertible debt in exchange for their investment.
– The type of support you need: Crowdfunding is more self-reliant in terms of the support you get from your backers. You may get some feedback and suggestions, but you are mostly responsible for managing your campaign and delivering your product or service². Angel investors are more involved in terms of the support they provide to their portfolio companies. They may offer mentorship, connections, advice and resources to help you grow your business.
Some examples of startups that got funded by angel investors are:
– Reddit, Dropbox and Airbnb, which received investments from Paul Buchheit, a former Google engineer and creator of Gmail.
– Zomato, Ola and Flipkart, which received investments from Jitendra Gupta and Amrish Rau, two fintech entrepreneurs and founders of White Venture Capital.
– Uber, Twitter and Pinterest, which received investments from Chris Sacca, a former Google executive and founder of Lowercase Capital.
– Canva, SafetyCulture and Culture Amp, which received investments from Perth Angels, a not-for-profit angel group based in Western Australia.
– Facebook, Spotify and Slack, which received investments from Peter Thiel, a co-founder of PayPal and Palantir Technologies.
Some businesses that have used crowdfunding to successfully grow their businesses are:
- Oculus VR: This company created a virtual reality headset that raised over $2.4 million on Kickstarter in 2012, and was later acquired by Facebook for $2 billion in 2014.
- Popsocket: This company invented a small plastic device that attaches to the back of a phone and can be used as a grip, stand, or holder. It raised over $18,000 on Kickstarter in 2012, and has since sold over 100 million units worldwide.
- Glowforge: This company developed a 3D laser printer that can cut and engrave various materials. It raised over $27 million on Kickstarter in 2015, and has since become one of the most popular desktop fabrication tools in the market.
- Flow Hive: This company designed a beehive box that allows users to extract honey without disturbing the bees. It raised over $12 million on Indiegogo in 2015, and has since sold over 75,000 units in more than 130 countries.
- City Lights Books: This bookstore is a landmark of the San Francisco literary scene, and has been operating since 1953. It faced financial difficulties due to the COVID-19 pandemic, and launched a GoFundMe campaign in 2020. It raised over $500,000 from more than 9,000 donors, and was able to stay open.