Arunangshu Munshi
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Editor's Note:-In this blog, we’ll cover the essentials of equity crowdfunding, how it works, why it’s gaining popularity among businesses, and its advantages and disadvantages. If you're considering funding options, this guide can help determine whether equity crowdfunding is the right path for your startup’s growth journey.
Securing funding can be one of the toughest challenges for new founders, especially when traditional options like venture capital feel out of reach. That’s where equity crowdfunding shines. Let’s first explore what it means.
Startup equity crowdfunding allows startups and early-stage businesses to raise funds by gathering smaller investments from larger groups of investors using regulated online platforms. Anyone can invest their money to get a small share of ownership in the company.
Gone are the days when founders or entrepreneurs raised or bought money from their family, friends, banks, or private investors. With crowdfunding, more people can invest in the journey of a startup, building both capital and a strong community around the brand.
Now that we know what equity crowdfunding is, let’s talk about how it works and what the equity crowdfunding pros and cons.
Let’s start with equity crowdfunding benefits for startups.
Equity crowdfunding opens up an investment opportunity for a broader audience in promising startups. However, the investors should be aware of the challenges and risks which include:
As we have learned startups raise money through crowdfunding, and they issue new shares to the new investors, which reduces the ownership percentage of existing shareholders. Over time, the founder and other stakeholders may see their shares of the company’s growth become smaller with each funding round , potentially impacting voting rights and profit shares.
Startups have big ideas but frequently face huge challenges. Many don’t reach profitability or survive for longer periods, so there's a genuine risk of losing the investment. If the company succeeds, the payoff can be great, but it’s good to weigh both sides carefully.
Unlike stocks in a public market, equity in crowdfunded companies isn’t easy to sell. Most likely, the investors need to hold onto these shares for several years until there’s a bigger event, like an acquisition or IPO. If any investor is looking for short-term gains, this may not be the best route.
Although most platforms screen companies, there’s always some risk of misleading information. Be wary of overly ambitious promises and always dig into the details. Trustworthy platforms can help, but taking a little time to verify things yourself goes a long way.
Equity crowdfunding offers an exciting way to be part of the next big thing, but weighing these risks, understanding the timeline, and investing with realistic expectations are key.
Equity crowdfunding is a great alternative to traditional bank loans, especially for startups with strong growth potential. But like any funding option, it comes with its own set of benefits and challenges.
Overall, while equity crowdfunding can be a powerful tool for raising funds, it’s important to weigh these pros and cons carefully before diving in.
Real Examples of Crowdfunding From Different Industries
In the early days, Sleepy Owl turned to crowdfunding to raise money. They used the Wishberry platform, offering backers exclusive access to their products and a chance to experience their personalized coffees. The campaign was a hit, allowing them to raise the necessary funds. Today, Sleepy Owl has become a beloved coffee brand with a loyal customer base
When Harsha Kikkeri and Shwetha needed funds to grow their tech company HoloSuit, they decided to go for crowdfunding. They used Catapooolt, a platform that connects entrepreneurs with people who want to support new ideas. They are able to raise the money that was needed to launch their project.
Aditya Iyer, the author of The Great Indian Obsession: The Untold Story of India’s Engineers, wanted to publish his book but didn’t have enough resources to make it happen. He turned to crowdfunding on Kickstarter and successfully raised $14,000, which allowed him to bring his book to life.
This is how Aditya used crowdfunding to share his story with readers.
Source Link:- The Economic Times
Equity crowdfunding gives startups a fresh way to raise funds and lets everyday people invest in early-stage companies, once limited to big investors.
And while this comes with risks like the chance of business setbacks, fraud, and security issues, it also brings the potential for big returns and the personal reward of supporting new ideas.
By broadening access to investment, equity crowdfunding is changing how businesses grow, though both founders and investors need to do their homework to make the most of its opportunities.
Equity crowdfunding allows startups to raise capital from a large number of investors online. This way, each contributor receives a small stake in the business and, for the startup, it raises capital without forming a dependency on a single investor.
The main benefits of equity crowdfunding for startups are that the startup gets access to a wider network of investors, there is no repayment pressure, there's enhanced brand exposure, and, of course, community support. This helps in retaining control of the business while raising decent capital to keep things running.
The pros of equity crowdfunding for early-stage companies are a wider investor access, market validation, and potential customer engagement. The cons of this include regulatory compliances, shared control, etc.
Some risks involved with startup equity crowdfunding are a high startup failure rate, low liquidity of shares, and potential for fraud if founders are not transparent or do not commit to clear communication and regulatory compliance.
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