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Crowd Funding vs Venture Capitalism - What’s the Difference?

At CapRock Services we provide a multitude of services. One area in particular where we excel is in helping businesses get the money they need in the form of small business loans. These loans can be used to assist in business growth or needed expenses without a loss of ownership or control.

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Other types of business investments include venture capitalist companies and angel investors who invest in businesses both large and small. However, crowd source funding has become a very popular alternative in recent years. Crowdfunding is now being used by businesses to fund product creation. Each type has their pros and cons. Here is a brief overview of both and how the two compare.      

Venture Capitalism

·       Pros: Finding angel investors allow companies to get funding through a traditional loan process. A key advantage is the experience venture firms offer. They can help guide smaller companies through growth periods by providing expertise in things such as taxes, finances and HR. Gaining access to resources such as these not only increase chances of success they can also increase overall growth. Also, venture and angel investors often have ties to the greater business community and such connections can greatly assist an expanding business.

·       Cons: When using a venture capitalist company or an angel investor, both are going to want to see a return on that investment. Also, both are risk aversive and will take a great deal of time to review a company before investing. For some businesses they just can’t wait that long. Lastly, venture companies many want partial ownership or controlling interest in a company, especially in their investment is a large one.

Crowd Funding

·       Pros: Startup crowd funding offers several advantages. Crowdfunding for business-based loans is highly flexible and scalable to a business’s needs. Also, due to drawing funds from a wide pool of investors, there will be several different revenue sources to come together to meet investment goals. Crowdfunded loans can scale in a way that traditional business loans cannot.  

·       Cons: When using crowd financing there are some drawbacks. Firstly, crowd-funding loans are unsecured, making for a more expensive loan via higher interest rates than a traditional loan. It is common for interest rates to be double the rate of a traditional small business loan. For example, the traditional loan could have an interest rate of 6 percent versus a crowd sourced loan having a rate of 15 percent. Also, crowdfunding pays out dividends based on yearly earnings, which can affect profit margins more than other types of investments that have more predictable payment plans.   

How The Two Compare

When a business is looking for seed funding to grow their company, it is important to be well informed on what their loan options are. As the above shows, venture capitalism and crowdfunding both offer advantages to businesses as well as having their own drawbacks to keep in mind. At CapRock Services we help make these important decisions everyday and provide the services and knowledge small businesses need to succeed. Contact us today to learn more.