crowdfunding vs traditional funding
Crowdfunding Vs. Traditional Funding
One must completely understand the difference between the two ways of funding before deciding which one will work best for setting up a business. This Buzzle article will delve on the new-age financial debate of crowdfunding vs. traditional funding.
Quick Tip
It is advisable that you raise seed capital through crowdfunding, but resort to traditional investors for any further funding requirement.| Crowdfunding | Traditional Funding |
| It allows you to collect funds for a new business online, through a large number of investors. Crowdfunding can be found on websites like Kickstarter, Indiegogo, RocketHub, Peerbackers, etc. | Traditional funding sources like loans from banks, financial institutions, grants, angel investors, venture capitalists, SBA, etc., help fund new and developing businesses. |
| Finding Investors | |
| Finding investors is relatively easier. | It requires time and effort to persuade investors to invest in a venture. |
| Validation | |
| Provides a sense of validation of the workability of the product or service by a number of people. | It does not provide scope for any kind of validation. |
| Background Work | |
| You will have to post video links, information, social media links, etc., describing how innovative and interesting your venture is. | You will have to provide necessary financial records, business plan, guarantees, etc., for the loan to be sanctioned. |
| Networking | |
| It provides a vast platform to network with people. | You only get an opportunity to network with a limited number of people. |
| Technical Ideas | |
| It will not work if you have complex and highly technical ideas which people may not understand easily. | No matter how complicated your business idea, if it has profit potential, you will get the funding. |
| Market Information | |
| As you introduce the product to many people at one go, you will get valuable information regarding market research and feedback. | Traditional funding options do not provide any kind of information about market research and feedback. |
| No Backers | |
| Chances are that you may not receive any kind of support if the idea does not seem viable. | Once the authorities are convinced that your project will work, your funding is guaranteed. |
| Maximum Amount | |
| The maximum amount one can raise cannot exceed USD 1 million in a 12-month period. | There are no such restrictions on raising capital. |
| PR and Marketing | |
| In order to get donors, you will have to create a PR and marketing splash even before you make the idea popular with the public. | You don't need any PR and marketing activities for getting your funds sanctioned. |
| Investor Orientation | |
| Here, investors are generally motivated by an innovative idea which they can identify with. Hence, if you have a click-able business idea, it will easily fetch funding. | Traditional investors are driven by revenue generation, profit potential, expansion and workability of the idea. |
| Theft of Idea | |
| You run the risk of making your unique idea public. | Your information is often safe with the funding authorities. |
| B2C | |
| Ideally suited more to B2C businesses rather than B2B businesses. | This type of funding is suitable for all types of businesses. |
| Raising Capital | |
| It is ideal for raising seed capital, which is generally less than USD 100,000. | Here, there is no such limitation, and you can raise both small and large capital. |
| Result Orientation | |
| Backers like to see immediate results and will not wait for a slow R&D process. | Traditional backers will allow you the leverage, the R&D process, and will wait for the regular business cycle. |
| After Campaign | |
| Once the campaign is over, the data remains on the crowdfunding website and you can always update it with latest information. This can act as a great marketing tool. | There is absolutely no scope for marketing through the traditional funding process. |
| Patents | |
| It is highly advisable that you register for patents with date/time stamps before you introduce the idea/project. | There is no need for filling patents as in most cases, your idea will remain guarded. |
| Reputation | |
| As you go public to collect funds, your reputation will suffer badly if you fail to achieve the goals set by your campaign. | As only a few individuals are aware about your venture, failure will not damage your reputation extensively. |
| Return on Investment | |
| Here, investors will have to be given impressive gifts and perks against the contribution made by them. | They will get interest, part of equity in your company, or position on the board of directors, etc. |
| Advice | |
| Though this will give you an existing market for your business idea, there will be no one to guide you for taking your venture to new heights. | On the other hand, traditional investors have the necessary experience and knowledge in your business. They will guide you to take the right business decisions. |
| Lack of Time | |
| No time to test your product, and if there are drawbacks, they will become public easily, your support may dwindle. | Investors will advice you to test the product and only then introduce it in the market. |
| In Case of Loss | |
| Even if you business idea fails, you are still obligated to fulfill the rewards and perks promised to your backers during the campaign. | If you face losses, traditional investors will work out a way to help you. |
| Business Control | |
| The control of the business will remain in your hands and the investors will not enforce their decisions on you. | The control is shared along with the investors, and they may override your decisions if they think it is not in the best interest of the business. |