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Why Crowdfunding Doesn't Replace a Venture Capitalist

Posted by Red Butler Team on 06/ 28/ 15





Startups inevitably reach a point when there is a compelling need to seek capital, whether it is before they launch a product, add to their staff, or expand into a new market. We take a look here at Crowdfunding and Venture Capitalists as a way to reach the next level of growth.



The need for cash comes at different times for each startup, and today's startups have the luxury of obtaining funding from a variety of sources. There are angel investors, venture capitalists, and a more recent option- crowdfunding. The desire to get cash with "no strings attached" is highly desirable for startups but a key component of growth strategy is market validation.  Startups need to know whether their business idea is going to succeed while their ROI is still viable. Crowdfunding offers a snapshot of what may happen if the product reaches a larger audience. However, after the initial capital is raised through crowdfunding, the business is left to then search for money again when that crowdfunding money has been used.

Here is a quote from a recent article in Entrepreneur which discusses different types of crowdfunding but comes to this conclusion:  "Since there is never enough money to feed the startup beast, I don't see crowdfunding replacing or crowding out angels or VC's in the near future." (You can read the whole article here). A few major advantages of crowdfunding is that the product can be tested at market, and cash can be raised fairly quickly.  It is a great way to get a "vote" on viability.  Success in crowdfunding gives traction to your growth and can then be showcased to a VC.  

So when should a startup consider a venture capitalist? Here is something to consider- crowdfunding doesn't offer the one-on-one advantage that a VC brings. Industry knowledge, connections, mentoring, and the ability to secure more capital at critical points of growth are just a few advantages a VC can bring to the deal. If your startup could benefit from these things, it may be time to seek a venture capitalist, especially if your business has already been validated through crowdfunding.

Whether your startup is just launching or is at another point of growth, there are many choices you can consider for your funding. It is a decision to be weighed against short and long term company goals, and not rushed into lightly.  Here are a few more growth strategies for your startup.



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Topics: Startups, Best Practices