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Why is Crowdfunding Heating Up While Venture Capital is Slowing Down?

There comes a time in the early stages of a business when its founders might begin thinking, “we can do much more if we can just raise a little more capital.” Maybe they’re looking to raise less than a million, or maybe they need to raise somewhere around $75 million. What they’re not looking to do, at least not yet, is to launch an IPO and go public.

If you’re in this position, you’re probably aware that venture capital (VC) and equity crowdfunding are two relatively popular ways to raise capital. Although both have a similar end goal, the process, experience, and implications for the future of your business may be very different across both lines.

Many small to mid-sized companies are bypassing the traditional VC route in favor of an equity crowdfunding approach. Why the shift? It really depends on the company’s preferences. And judging from the increased popularity of raising funds via Reg CF and Reg A+, these are the likely reasons why smaller businesses are moving to equity crowdfunding.

The Hassle of the Pitch and Other Continued Negotiations

The excitement of preparing and delivering a pitch to prospective investors may be thrilling on Shark Tank but in real life, it can be an anxiety-saturated task; especially if a lackluster presentation clouds the brilliance of your business idea. Even if you get past the “pitch” phase and a venture capital firm decides to take you on, you may be looking at a long, drawn-out, and complicated negotiation process.

In contrast, the pitch and presentation environment of a Reg CF or A+ offering doesn’t have to be an anxiety-ridden event. It can be made accessible during the entire campaign. Moreover, you can shape, and expand your “pitch” where appropriate via web pages, video presentations, events, press releases, blogs, and podcasts. Since you’re able to promote your shares to the widest possible audiences (within regulation), you’re limited only by your resources and creativity.

Losing Control of Your Business

Perhaps the worst-case scenario for every founder who enters a VC deal is that the VC decides to oust the founder from a CEO or leadership position. For the founder, that’s like “game over.” The business may continue to operate, but the founder just lost control over the very company she built.

Unless you’re looking to sell your business, you probably want to continue guiding the direction of your company. Diluting your control over to VC-driven leadership or a Board of Directors is a real risk that goes with the territory. In contrast, with a Reg CF or A+ offering, you maintain control over the destiny your company. The burden of responsibility on your end may be heavier without VC support, but the company you’ve founded is still yours to run.

Your Size or Industry May Not Offer the Best Prospects for a VC

We can assume that venture capitalists are looking for solid startups in high-growth markets. Industries like technology, biotech, or blockchain (among others) come to mind. Such criteria can negatively affect companies that aren’t operating in that high-growth zone.

Furthermore, if your business has been established for some time, enough to be considered “mid-stage,” meaning less pliable, that may also bump you down a few notches on a VC’s proverbial “hot” list.

Crowdfunding investors are diverse enough to cover a wide range of industries and sizes. Not all are attracted to emerging industries, high-profit prospects, or newly-formed startups. Some of these investors may be your customers, locals who are interested in supporting a neighborhood business, or people who simply like what you’re doing or the cause your business serves.

Your Company’s “Somewhere” Is in the Middle of “Nowhere”

Remember the presentation and lengthy negotiation hassle that we mentioned above? What if your business is located in a relatively populated area but far from a VC hub—what then? Yes, you can meet via virtual meeting spaces but when it comes to the fate of your company, virtual is probably not going to cut it.

The wonderful thing about equity crowdfunding is that you can reach out (via promotion) almost anywhere while leveraging your company’s locality, starting with your own customers. Equity crowdfunding offers a process that’s geographically flexible and logistically much simpler than raising capital through venture capital.

The Bottom Line

There are certain companies in specific industries that may benefit greatly from venture capital. It isn’t for every business. If your business happens to stand slightly to the margins of the VC spotlight, or if you’re looking for a capital raise that’s more favorable to your business vision and one that keeps you at the helm of your proverbial ship, then you might want to consider the options available to you through an equity crowdfunding campaign.

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