Crowd and equity funding are on the rise, so much so that in the past five years the industry has expanded by 1000%. FlashFunders, the first no-fee equity-funding platform, launched last month and is already announcing three funded startups. Kickstarter has pledged more than $1B for 70k startups in the 5 years they've been in business.
Both have their benefits when it comes to growing a business, but to know which route is best for your startup you need to understand the difference between the two.
Do You Want Customers vs. Investors?
Crowdfunding projects, like Kickstarter, are generally donation or gift based, where fans or "backers" receive early versions of the product. Equity funding, like FlashFunders, involves selling ownership in your business.
Investors with ownership can often add additional value to the growth of your business, from introductions to the right channels to feedback on product development. In the equity funding process you have a chance to speak to potential investors and choose wisely.
Backers of crowdfunding campaigns have less vested, the amounts committed are typically lower and they do not spend time doing diligence on your company or engaging your team.
NOTE: Anyone can participate in contributing money to a crowdfunding campaign. Only accredited investors can participate in equity funding. There's 8.5 Million Accredited investors in the US, defined by the SEC as someone who makes $200K a year or has a net worth of $1M, excluding the value of your primary residence.
Is Your Goal Marketing and Product Development or Company Growth?
Crowdfunding is often used as a promotional marketing tool to sell your product. It's a great way to validate demand in the marketplace for your product. The problem with crowdfunding is that creators who run successful campaigns are often left with large orders to fulfill without the operational capital to pull it off.
Equity Funding on the other hand is focused on raising operational capital, which helps you grow your business. When you sell equity ownership in your company you'll raise capital to make strategic hires and expand the scope of you business, instead of using every dollar you raise to fulfill product orders.
FlashFunders requires businesses to clearly outline how they will use their funds on the offering page, under "Use of Proceeds." "It's the first question most investors ask, 'how will you grow your business with this captial' " said Vincent Bradley, CEO of FlashFunders. "On Kickstarter you don't have investors, you have fans."
Is This a Hobby or True Passion?
Many project creators use crowdfunding platforms as a means to launch short-lived projects or ideas that have a clearly defined beginning, middle and end. If you're looking to produce a film, develop a new type of wallet, or launch a hobby--then crowdfunding might be for you.
If you're looking to grow your business, which might mean hiring an engineer, increasing the size of your sales team, or improving manufacturing processes, then equity funding is probably a better option. As we discussed earlier--equity funding is more about raising operational capital and less about marketing your product.
Ryan Detert, CEO of Influential Network, recently raised 750k in 30 days on FlashFunders to build sales teams in LA and New York. "FlashFunders is the RoadShow2.0, it's the way it should be done.," Said Ryan Detert, CEO of The Influential Network. "Everything an investor wants to see is in one place and managed easily from the platform. As a CEO I was able to stay focused on growing the business while FlashFunders brought in global investors."
While it's fine to crowdfund your hobby, equity funding is about raising capital to innovate within an industry.
NOTE: I'm an advisor to Influential Network. I've also been able to help raise funds for several other companies. With technology advancing, it's allowing new ways to raise capital that's helping companies more than ever before. This allows startups to focus on their business while relevant investors seek them out, not the other way around.
Are You Non-Profit or For Profit?
Crowdfunding is a great way to raise funds for you non-profit and there are many non-profit focused platforms to help you with this.
Equity funding platforms however are meant for raising capital for for-profit businesses. When investors back a startup they are doing so with the hope to see a return on investment.
Why Not Do Both?
As of August, 9.5% of the hardware projects marketed on Kickstarter and Indiegogo went on to raise venture capital funds.
After a successful crowdfunding campaign it is often a good time to look for further growth options. If you're interested at this point in growing your businesses operations--equity funding could be the way to go.
Among the largest 2014 VC deals to crowdfunded hardware projects are smart bulb startup Lifx, which raised a $12M Series A led by Sequoia Capital after previously raising $1.3M on Kickstarter and a $10M Series A led by Khosla Ventures to home security product Canary
If you think you're a candidate for equity funding visit FlashFunders University and get acquainted with the process. Chances are, if you've done a Kickstarter campaign, you're more than half way there in getting the process started.