Many people are turning to equity crowdfunding as a way of raising funds for their business. Equity crowdfunding is becoming more popular, and the number of companies using it to raise money has increased by 53% in recent years.
The concept behind equity crowdfunding is simple: An individual or company wants to start a business but doesn't have access to savings or capital--or they want more customers without having problems accessing financing from banks and other traditional sources like angel investors or venture capitalists. They then connect with people online through social media channels, online communities who will back the business in exchange for equity in the company.
It is also a way for startups to raise money without having a credit rating. Equity crowdfunding can be used in many ways as an alternative financing choice, such as either debt or equity.
This article will discuss what is meant by the term "equity crowdfunding" and how it works. It will also talk about some of the pros that come with this method and some possible cons, which entrepreneurs should be aware of before using this option.
What Is Equity Crowdfunding?
Equity crowdfunding is an alternative form of fundraising that includes selling stakes in a company to investors. In this type of financing, entrepreneurs offer up equity ownership, and users can invest as little as $100.
It allows entrepreneurs and new business owners to raise funds from a large pool of investors without going through the time and expense required for an IPO. These same business owners may not have access to savings or capital, which allows them to create and grow their businesses while helping the local economy.
The companies raise money by connecting with people who want the chance to become part owners. It's important for entrepreneurs looking to use this method to understand their risks before they begin their campaign.
Pros of Equity Crowdfunding
Some of the pros of equity crowdfunding include the ability to raise money for any idea, the lower cost of starting a campaign, and that it's easy to distribute ownership. Entrepreneurs and startup companies can use equity crowdfunding to raise money in exchange for an ownership stake. This has become a popular way for many people who are looking for an opportunity to create a successful business.
This process is also an easy way for entrepreneurs to raise money through crowdfunding because it's much more affordable than other methods like a traditional bank loan or venture capital investment. The companies raising funds by joining with people who want the chance to become part-owners do so in exchange for equity stakes that give them ownership rights of any profits generated from this campaign.
One big advantage of equity crowdfunding is better access to investors. Instead of pitching to a limited number of investors, an entrepreneur can reach hundreds of thousands through social media, websites, and other sources.
Another advantage of equity crowdfunding is that the process is much faster than other types of fundraising. Getting a funding decision can be as short as three days, versus two months on average with traditional equity financing.
A recent study showed that most startups raised an initial round through family and friends before turning to equity crowdfunding which made up only 11% of their total fundraising efforts.
Cons of Equity Crowdfunding
Equity crowdfunding companies also have some downsides. Setting up and running the campaign takes time, and it's important not to get caught up in the hype around this new method for raising money. Some people have concerns about equity crowdfunding as an investment because there are no guarantees if entrepreneurs fail, while some worry about fraud or scams happening with this type of financing. It can also be hard for companies who use this method to find investors since they're relying on word-of-mouth and social media campaigns instead of marketing strategies used by traditional financiers like banks or venture capitalists. The biggest drawback is that there are no guarantees you'll make your goal amount since all investments are risky ventures with high potential returns and a slim chance at success.
Some disadvantages are that government agencies have less oversight, and investors may not have enough experience in investment capital for small businesses or startups. This type of investment is also riskier because it doesn't offer any protection if the company fails but instead offers upside potential via royalties on profits generated from this campaign.