If you haven’t noticed crowdfunding’s explosion on to the business scene, chances are you’ve probably been living under a rock. In 2015, crowdfunding grossed more than $34 billion; an estimated 2,000 global platforms tied to that industry are expected to surface by year’s end.
These numbers suggest startups would be wise to consider crowdfunding over traditional angel investors when bankrolling their ventures. After all, most young companies seek collaborative investors, and crowdfunding allows people who are passionate about a project to contribute in a meaningful way.
But the benefits don’t stop there. Crowdfunded companies carry less risk because founders can raise the necessary capital without instantly giving up equity. Plus, crowdfunded campaigns serve as free marketing tools that help spread the word about a business and drive traffic back to its website and social media channels.
But that doesn’t mean it’s the right solution for every business. Angel investing is the standard, and it can still be effective for startups with specific goals and benchmarks in mind. If angel investing and crowdfunding are your company’s two most promising funding options, ask these four questions to determine which path to follow:
1. How much do we need?
How much your startup requires will dictate which fundraising route it should follow. For example, if you need to raise more than $100,000, an angel investor may be the better option.
The biggest advantage of an angel investment is that it allows you to focus on day-to-day tasks without being bothered by looming financial concerns. Additionally, statistics show you’re more likely to be successful in getting this level of investment from an angel investor than you would through crowdfunding.
2. How unique is my idea?
Crowdfunding isn’t an ideal method when it comes to complex projects. If you can’t explain your concept to a layperson, it may be better to find an investor with knowledge and experience in an industry closely related to your field.
If your idea is too niche, it will have less appeal in the B2C space, something crowdfunding thrives on. Simply put, crowdfunders largely back ideas that benefit consumers — aka themselves — and the idea should resonate pretty quickly in order to be successful.
3. How will we grow?
The focused appeal of a crowdfunded venture can have its drawbacks. There’s a chance you’ll miss opportunities for future expansion if you choose this tactic because your investors will have put their money in one very specific idea.
If backers disagree with your next move, they’re less likely to continue investing. Angel investors, on the other hand, tend to offer more longevity with their financial contributions. Crowdfunding may be less expensive and less time-consuming at the start, but angel investment may be the more promising option if you’re looking for a more long-term relationship.
4. Do you work better solo or in a group?
You know the phrase “too many cooks in the kitchen”? The collaborative spirit crowdsourcing sparks can bring this issue to the surface.
If you’re confident and comfortable working in large groups, crowdfunding may be the way to go. But if a one-on-one setting is where you thrive, it may be better to work with an angel investor. Consider the nature of your industry as well. Some industries, like the tech space, naturally lend themselves to a more collaborative atmosphere.
Like anything, there are pros and cons to crowdfunding, but one thing is certain: An increased sharing of ideas and methods is something all new entrepreneurs can benefit from. As a new business, you’re bound to make mistakes, so more feedback from colleagues and investors could be just the thing to keep you from falling over the usual stumbling blocks startups encounter.
In that sense, a crowdfunding campaign is always worth considering. However, don’t be ashamed to go the more traditional route. Some business ideas simply lend themselves better to an angel investor, and you have the power to decide.