Crowdfunding vs Private Investors

Look at you, all in super-serious research mode…deciding whether to channel seed capital into your business idea through crowdfunding means or a private investor. Nice!

Each is an incredible option, huge actually, but once you commit it’s a challenge to juggle both (unless crowdfunders are considered private investors).

Now, that being said, no one here’s claiming to be an expert crowdfunding extraordinaire or a big-wig in capital raising… but I’ve been working in/around these worlds for a while as a tech consultant, serial entrepreneur, and investor.

So let’s start with three things they share in common.

Crowdfunding & Private Investor Commonalities

  • Both can be conduits for massive forward momentum if you’re stuck, not just in terms of financing, but marketing, innovation, software integrations, you name it.
  • Both can provide brand visibility opportunities whether that be through media, obviously the crowdfunding/startup investment communities, niche ambassadors, and more.
  • Both give you plentiful room to negotiate terms rather than being boxed into them via competitions, incubators, accelerators, conventional lenders, etc.

Pros of Crowdfunding Seed Capital

As these words are being typed in VERY late 2017 (end of Nov), all the buzz is on cryptocurrencies (CC), and rightly so, but precious little PR is given to the unbelievable expansion of crowdfunding both in the U.S. and worldwide.

Crowdfunding is massive and a new economic paradigm or evolution within consumerism, especially when combined with CCs!

According to Fundly:

  • $25 Billion P2P Lending
  • $34 Billion Raised Globally
  • $5.5 Billion Reward & Donations
  • $2.5 Billion Equity Crowdfunding
  • 270,000 Jobs Created
  • $65 Billion Added to Global Economy

The numbers, stats, and monetary amounts just keep going, getting bigger and more complex. Point is, it’s a tsunamic marketplace. And we’re only discussing the, for the lack of a better term, “Kickstarter-style” where you set a funding goal, create/implement a campaign, and hopefully raise the resources you need to do as planned.

Equity and P2P lending are their own topics which I’ll save for another time. Meanwhile, here’s the top 3 Pros to Kickstarter-style crowdfunding in my estimation.

Pro #1: No Equity Loss

If you’re building an exchange of equity into your particular campaign, for example to lure substantial donations or backers, that’s fabulous. Otherwise, crowdfunding in general is a way to raise capital without giving away any legal stake of ownership. When you deal directly with private investors, angels, and VCs that won’t be the case.

This means there’s more equity to bargain with if/when you do approach investors later on.

Crowdfunding can absorb the initial costs of product development and manufacturing while also serving as market exposure and history of money generation. Right?

Brilliant!

If you haven’t already, browse common crowdfunding platforms and you’ll see legions of successful campaigns getting 80% of their funding from roughly 20% of their backers (the ol’ 80/20 rule in action yet again).

Within that 20% are probably a handful of private investors, or even access to private investment groups, angel networks, and so on.

Pro #2: Viral Potential

If you sow serious time, effort, money, consideration, sweat and tears into a crowdfunding campaign, you have about a 50% chance of reaping your goals according to rough global estimates. Beyond that, you’ll enjoy a fair amount of visibility with a shot at going viral via social media, within your niche, within crowdfunding communities, the press, who knows?

Admittedly, I’m a devoted Ferris Fan, so while it was published back in Dec of 2012 and there’s some outdated stuff, it’s still a classic if you’re interested – “Hacking Kickstarter: How to Raise $100,000 in 10 Days

On the other hand, once a private investor flat-out says no, well, that’s pretty much it.

Pro #3: Well-Oiled Machines

The top 10 crowdfunding platforms in America, and globally, have the process down to a science. They also have established audiences. From how you setup your campaigns and interact with backers, to how the money is processed and everything between.

They aren’t perfect but they work well.

Private investors can have their “own way” of doing things you may not be able to mesh with.

Communication and feedback are critical here. If a private investor isn’t interested they might explain to you why, but probably not. With crowdfunding, you can get tons of direct feedback that help you with your campaign and your product/service, business plan, etc.

 

Upsides of Bringing on a Private Investor

What exactly do I mean by private investor?

Basically, someone like me who doesn’t represent an investment group, nonprofit or organization (though I do collaborate with them) and can tolerate more risks, but who’s willing to drop less coin as conventional avenues.

For example, if you have some heavy suit come in and drop 100k, how in the world does this person not now own the majority share of your startup? Are you sitting on something with a valuation of $100 million? Okay, if not, if you’re like most folks with a feasible money-generation idea, that’s just not a practical way to go.

Most VCs, incubators, and so forth are going to want to invest big numbers.

A private investor like me is willing to invest far less, say $2,000 up to $25,000 in exchange for a smaller share of the idea’s future capitalization. Cool? On to the upsides!

Upside #1: Less to Deal With…

Oh, the complexities of planning/designing, organizing everything/a team, and managing an effective crowdfunding campaign (along with press and fulfillment when successful)!

Just getting it off the ground without a hitch… then, fast forward to when you have hundreds or thousands of backers, digital marketing assets in play, ongoing information capture/production for marketing – videos, new imagery, animated GIFs, updates, blogs, interviews, etc.

With a single private investor, it starts off simple. Oftentimes, provided we love what you’re doing, we simply become a source of smart capital, consultation, and smooth optimizations.

For example, I can help revolutionize tech manufacturing for most startups, and there’s a small fraction of the logistics involved to make it happen.

Upside #2: Climbing Odds of Success

We’ll just agree the global success rate for reward/donation-based crowdfunding is presently hovering at around at least 50’ish%. That’s not bad. If I walk into the room those chances probably shoot up another conservative 20-40%, depending on a number of variables.

Why?

Easy – I won’t walk into the room unless that’s so. Walking into the room means I’ve done my homework, researched what you’re doing, have looked at your valuations/estimates/business plan, and so on. I’ve already made some calls (without disclosing anything of course) and have a good idea of where my network and I (and some seed funding) can take you.

Speaking of which…

Upside #3 Fast-Track/Inside-Networks

Maybe you and your best friend work retail, but in your spare time developed a snazzy new smart travel bag that’s stylish, digitized in simple but functional ways, and ready to make a splash in the crowdfunding/luggage world.

Are you prepared to devote the next 6-8 months to researching the top 10 crowdfunding platforms, choosing one, then designing an effective campaign? Then, can you manage it? If the thought freaks you out, one savvy private investor can blow their horn and rally troops within days.

  • Suddenly, a tech team of wizards are aboard with experience.
  • Suddenly, you can afford decent interactive retail displays.
  • Suddenly, you’re connected to top tech manufacturers and retail owners.

You get the idea.

To Summarize

I’ve said enough. You didn’t sign up for a collegiate-level breakdown of either taking on a private investor or the crowdfunding realm, but more of a positive overview. That being said, keep digging, searching, and researching until your mental kettle starts whistling. If by chance you’d like to take things a step further, feel free to Submit Your Pitch in my 2018 startup hunt!

 

Happy trails,

Matt

 

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