Small businesses have several viable funding options.
There are several options available when it comes to raising funding for a business, from attracting investors to crowdfunding. — Drazen_/Getty Images

Raising money to fund your business is a complicated process. There are many types of funding options available, with two of the most popular options being venture capitalists (VCs) and crowdfunding. We defined and outlined pros and cons of each option, so you can decide which is the best for funding your business.

What is crowdfunding?

Crowdfunding raises money through the wider population, instead of from a centralized bank, investor or group of investors. There are four types of crowdfunding:

Reward crowdfunding

This type of crowdfunding can be found on sites like Kickstarter or Indiegogo. Members who fund a new company are often given incentives, like free products or an early access look at a new service.

Equity crowdfunding

This is where investors who provide funds do so in exchange for equity, or ownership, in your company.

Debt or microlending crowdfunding

This type of crowdfunding is a little more complicated and involves things like mini-bonds, peer-to-peer lending and invoice financing.

Donation-based crowdfunding

Companies participate in this type of crowdfunding on sites like GoFundMe. It’s similar to reward crowdfunding, but your supporters will receive nothing in return (except for, of course, the eventual creation of your business).

[Read: Everything You Need to Know Before You Start Crowdfunding]

Pros of crowdfunding

  • Accessibility: Funding your business can be as simple as making a post on a site like Kickstarter. You won’t have to jump through any financial hoops like with a bank or VC.
  • Feedback: Crowdfunding is a good way to get in front of potential customers. While many may be eager to fund your budding venture, it may be even more valuable to ask for advice, network and get initial feedback on your product or service.
  • Market validation: Perhaps you’ve been working on a side hustle for quite some time; what better way to test its market value than posting your concept on a crowdfunding site?

[Read: 8 Benefits of Equity Crowdfunding]

There’s no guarantee you’re going to get your business funded when it comes to crowdfunding.

Cons of crowdfunding

  • Unreliability: There’s no guarantee you’re going to get your business funded when it comes to crowdfunding. While VCs and traditional banks are also not guaranteed, they are lending institutions that provide money to small businesses on a regular basis. If you have a great idea, it doesn’t necessarily mean the public will buy into it.
  • Limited scalability: Crowdfunding can oftentimes be a one-time funding round. That means once your goal is met, you may not be able to raise more funds.

What are venture capitalists?

Venture capitalists (VCs) are investment firms or groups of investors who look for fledgling startup companies and small businesses to support financially. They provide investment in exchange for equity, and can provide multiple rounds of investment as a company grows. They also can sometimes assist with business plan development, product development and other consulting services as part of the investment.

VCs exist in every city, but the most famous operate in Silicon Valley. Sequoia Capital, for example, has invested in companies like DoorDash and 23andMe.

[Read: How Three Venture-Backed Startups Balance Growth and Profitability]

Pros of VCs

  • Resources: When you work with a VC, you’re working with an established lending institution that can provide a lot of capital for your growing business.
  • Scalability: VCs have the resources and connections to help you grow in what can feel like an unlimited fashion. While crowdfunding may be ideal to get started, VCs can take your business to a national scale.
  • Expertise: In addition to the resources and connections, VC firms are made up of savvy business minds who can help you grow your business.

Cons of VCs

  • Strings attached: While all the resources, connections and expertise can be helpful, it could become overbearing depending on your situation. As the main funding agent behind your company, VCs may take liberties with shaping your company.

[Read: A Guide to Raising Venture Capital Funding]

What works best for you depends on your business and its goals. It’s important to consider, however, that you should explore all funding options available to you. That could mean crowdfunding to get your business off the ground, then VC investment when it’s time to scale things up.

CO— aims to bring you inspiration from leading respected experts. However, before making any business decision, you should consult a professional who can advise you based on your individual situation.

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Published January 28, 2020