Crowdfunding is one of several ways that a business can raise investment. Other more traditional methods include taking out a loan or seeking institutional investment. Equity crowdfunding campaigns are usually hosted on third-party platforms the investment the company and the investor. In the UK, these platforms include Crowdcube and Seedrs, both of which have regulatory approval from the Financial Services Authority (FSA).
Every equity crowdfunding opportunity is different; the objectives and terms of each campaign will be set by the company seeking investment. The details of the opportunity - including the minimum investment amount and the length of time that people have to invest - should be available on the crowdfunding platform that hosts the campaign.
After investing, people who receive shares in the company have partial ownership of it. This means that if the company performs well, the value of the shares will increase, and the investor will stand to make a profit. If the company performs badly, however, the value of the shares will decrease, and the investor could stand to make a loss.
While crowdfunding is a great way to get through the first run of your product, or prove to other investors that people are interested in what you are doing, it’s not the best option for long-term funding. A successful crowdfunding campaign helps prove to VCs, angel investors and banks that there is a demand for a product in a marketplace, removing some of the risk from the equation. But VCs still have their place and there is much more they can bring to the table. Venture Capitalists give entrepreneurs more than just money. Many of them understand how to build start-ups more so than the typical investor providing funding through an online portal. Many VCs can provide introductions to potential suppliers and customers and give assistance rounding out a management team. Many VCs have connections to companies that can acquire start-ups and ties to the investment bankers that take them public. Those connections are worth something to many entrepreneurs seeking to exit from investments in their own new companies.