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.
Equity crowdfunding allows startups and early-stage businesses to raise funds by gathering smaller investments from larger groups of investors using online platforms and social media. People can invest their money to get a small share of ownership in the company.
In earlier days, founders or entrepreneurs raised or bought money from their family, friends, banks, or private investors. But through crowdfunding more people can invest in the journey of a startup and build a strong network.
Now that we know what equity crowdfunding is, let’s talk about how it works. This approach lets everyday people invest in a company by buying shares, giving startups a chance to raise money while offering partial ownership in return. It’s a great way for businesses to grow and for investors to support projects they care about.
Equity crowdfunding enables businesses to raise money by connecting directly with different investors on online platforms. To begin with equity crowdfunding a company should create a profile, and share important information like its business plan, pitch deck, and financial statements. These documents can help potential investors to understand the company’s vision and make the right decisions.
Once the company’s profile is active, it sets a fundraising target and interacts with investors. Unlike traditional debt funds., equity crowdfunding involves giving investors a portion of ownership in the company in return for their capital. This approach opens up access to capital for a broader audience, allowing experienced and everyday investors to support and benefit from promising 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 essential.
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.
Some of the famous examples of Crowdfunding from different industries are mentioned below:
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. While it 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.
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