How Crowdfunding Is Challenging Traditional Venture Capital

How Crowdfunding Is Challenging Traditional Venture Capital

Picture this.

You leap out of bed at 2 a.m. You’re scrambling for your notepad, reaching for your pen, and feeling for the light switch all at once.

No, you haven’t been hit with bad news. And no, you weren’t processing a work problem in your sleep. You were just hit with a multimillion-dollar business idea.

In the 1980s, the best way to finance your entrepreneurial dreams was to go through the ultra-competitive venture capital model. But now, more and more would-be entrepreneurs are turning to crowdfunding.

We’re going to tell you three major ways that crowdfunding has been disrupting the traditional venture capital financing model. Just keep reading.

  1. The Platforms Allow Founders to Change Their Goals

Traditionally, many venture capital firms have provided financing to startups with great M&A or IPO prospects. Why? Because that’s traditionally been the only way to cash out an equity finance position.

But what happens if a founder decides to stay private or doesn’t want to be acquired? Is there anything that can be done then?

Also Read: Steps to Get Funded Quickly Through DonorsJoint’s Crowdfunding Platform

Crowdfunded equity financing campaigns can be traded on secondary markets. This in turn means that investors can sell their shares as needed without having to wait for an IPO or a merger to exit.

As a result, founders who want to take their business in a different direction can do so without fear of costing investors money.

  1. Founders Who Might Not Be “Venture Capital Material” Can Still Pursue Their Entrepreneurial Dreams

According to Investopedia, around 90% of startups fail. As a result, firms tend to be very picky about the businesses they invest in. And for them, a part of that due diligence often involves taking a close look at management.

In addition, it’s not unusual for minority founders to struggle with having access to capital. Crowdfunding provides company founders with greater access to potential angel investors.

  1. Crowdfunding Gives Startups Access to Additional Capital

Even if you have the greatest business model in the world, there’s no escaping the fact that making money as a company requires . . . money. And sometimes you need a lot of cash on hand to make your business viable.

Suppliers want money. You need to cover payroll. But, it’s also not unusual for investment firms to want certain milestones to be met before they’ll finance a second round of funding.

In 2020, Eurweb reported that George Floyd’s family was able to raise over $14 million through GoFundMe. This type of GoFundMe success reveals the potential of crowdfunding platforms as another way to raise capital.

This Is Why Crowdfunding Will Continue to Be a Big Deal

It used to be the case that aspiring entrepreneurs needed access to venture capital funds to have a shot at making money. After all, bootstrapping just isn’t always feasible for certain businesses.

The major strength of crowdfunding is that it makes money, and investing, more accessible for everyone. And as it turns out, asking a bunch of people to donate a little bit of money can drive major results.

Want to read more entrepreneurial and business articles like this? Check out the rest of our site.