Crowdfunding and venture capitals are two main ways of startup companies and small business can receive capitals. Unlike taking small business loans, both methods require little liability if the business fails. Although their purposes are to receive funding, their methods are very different. Crowdfunding is similar to donation but venture capital is an investment.
Crowdfunding is a way to receive funding from a network of people. They can be friends, family members, classmates, or people on the internet. Most people can give at a crowdfunding campaign. The money coming from crowdfunding is not loan nor investment, but in the form of donations. In modern days, there are plenty of crowdfunding platforms like KickStarter, IndieGoGo and GoFundMe. Different platforms have different fees/equity, set of rules on time, and monetary limit. For example, if a video game development company wanted to fund their game at IndieGoGo, they will try to get as many donors as possible for their new game under the procedure of IndieGoGo. After the campaign is succeed and game is released, the developers will be giving free gifts or their new released game to their donors.
In the same time, crowdfunding is regulated in many countries including the US. On October 2015, the Securities and Exchange Commission enacted that equity crowdfunding rules of the Title III of the JOBS Act. It stated the limit the amount of money startup companies and individuals can receive in a crowdfunding project within 12 months. Also, under the regulation, not everyone can receive or give during a crowdfunding campaign. In addition, as crowdfunding is built based on trust among different parties, crowdfunding fraud may happen.
Venture capital investment is when a startup/small company looked for funding from venture capitalist or angel investors. As return, the venture capitalist are looking for high return of investment, equity of the company, or even influence on that company’s decision. Ultimately, everyone who has a large share of the company stocks can alter business decisions. Also, the venture capitalists can leave anytime with their money. Nevertheless, the venture capitalists/angel investors are taking big risks when investing money on startup companies since startups have a high failure rate due to inexperience management, lack of resources and other factors.
There are more ways to fund a company besides crowdfunding, taking capital investments, and taking small business loans from banks. The government provides loans and grants to certain businesses such as renewable energy companies. At last, entrepreneurs can always rely on their own capital to avoid troubles such as sharing equities, regulations of crowdfunding, or loans.