Funding sources for Start Up

An angel investor is someone who invests money (usually their own) in start-up businesses in
return for some equity in the company. While there are angel networks where several
investors will pool their funds, many angels operate as individuals.
While angel investors won’t necessarily provide the seed money for a start-up to get off the
ground, they do tend to invest in companies pretty early on in the business funding lifecycle.

Who can be an angel investor?

In theory, angel investors must be accredited investors according to the SEC definition. In practice,
people often consider individuals like their family and friends to be angel investors.
Since they’re dealing with young, high-risk businesses, angel investors tend to invest relatively small
amounts—an average of $330,000.1 But unlike a small-business loan, that money never has to be paid
back. Instead, angel investors will get company equity. We’ve seen angel investors ask for anywhere
from 10% to 40%, but 20% to 30% is pretty typical.
But money isn’t the only thing angel investors provide; it’s common for angels to provide mentorship
to the companies they invest in. So if you’re willing to give up a little equity, an investment angel
could have a lot to offer your business.

What is a venture capitalist?

Much like angel investors, venture capitalists (VCs) fund start-ups by providing money in exchange
for equity. But most venture capitalists are part of venture capital firms. And since those firms are
often funded by investors, that means venture capitalists usually aren’t using their own money to
invest. More importantly, since they have their own investors to answer to, it means VC investors
expect a sizable return on investment.
So how does that affect their investment patterns? Well, for starters, they like more mature startups—
venture capitalists tend to invest in businesses that have already gone through a couple rounds of
funding.
Venture capitalists also invest more into those businesses—the average is a whopping $11.7
million.2 But that money doesn't come cheap; venture capitalists ask for somewhere between 25% and
50% equity in the business.
Plus, VC investors usually insist on getting a seat on the company board of directors. That’s usually
less about mentorship and more about getting the company to a point where it has an IPO so the
venture capitalist can cash out and get a big return.
What’s an IPO?
IPO stands for initial public offering. It’s when a privately held business first starts selling on the
stock market—which gives existing shareholders a chance to cash out their shares.
This is one of the reasons a business owner might avoid VC funding: you’re giving up more equity
(sometimes enough that you lose control of the company) to someone who cares a lot about short-
term profitability—not necessarily where the company goes in 20 years.

Angel investors vs. venture capitalists

So how are angel investors and venture capitalists different? Well, if you’ve read this far, you’ve
probably already figured a few things out:
1. Angel investors invest smaller amounts than venture capitalists.
2. Venture capitalists ask for more company equity than angel investors.
3. Angel investors fund younger, less established businesses than venture capitalists.
4. Venture capitalists look for a bigger return on investment than angel investors.
5. Angel investors spend more time working with and mentoring business owners than venture
capitalists do.
Of course, there are some exceptions. You can probably find venture capitalists who love nothing
more than mentoring business owners, and you’ll find angel investors who don’t want to get too
involved with the business owners they invest in.
For the most part, though, the differences above hold true. So you can probably understand why angel
investors get called, well, “angels,” while the VC industry often gets a bad rap.
But at the end of the day, both angel financing and venture capital can provide a valuable source of
funding to startups.
What Is Crowdfunding?
Crowdfunding is the use of small amounts of capital from a large number of individuals to finance a
new business venture. Crowdfunding makes use of the easy accessibility of vast networks of people
through social media and crowdfunding websites to bring investors and entrepreneurs together, with
the potential to increase entrepreneurship by expanding the pool of investors beyond the traditional
circle of owners, relatives, and venture capitalists.
 Restrictions apply to who is allowed to fund a new business and how much they are allowed
to contribute.
 Crowdfunding allows investors to select from hundreds of projects and invest as little as $10.
 Crowdfunding sites generate revenue from a percentage of the funds raised.
 The SEC regulates equity-based crowdfunding ventures in the United States.
 Kickstarter, Indiegogo, and GoFundMe are among the most popular crowdfunding platforms.
How Crowdfunding Works
In most jurisdictions, restrictions apply to who can fund a new business and how much they are
allowed to contribute. Similar to the restrictions on hedge fund investing, these regulations are
supposed to protect unsophisticated or non-wealthy investors from putting too much of their savings
at risk. Because so many new businesses fail, their investors face a high risk of losing their principal.
Crowdfunding has created the opportunity for entrepreneurs to raise hundreds of thousands or
millions of dollars from anyone with money to invest. Crowdfunding provides a forum to anyone with
an idea to pitch it in front of waiting investors.
One of the more amusing projects to receive funding was from an individual who wanted to create a
new potato salad recipe. His fundraising goal was $10, but he raised more than $55,000 from 6,911
backers. Investors can select from hundreds of projects and invest as little as $10. Crowdfunding sites
generate revenue from a percentage of the funds raised.
Types of Crowdfunding
The two most traditional uses of the term reflect the type of crowdfunding done by start-up companies
looking to bring a product or service into the world and by individuals who experienced some type of
emergency. Many individuals affected by a natural disaster, hefty medical expense, or another tragic
event such as a house fire have received an amount of financial relief they wouldn't otherwise have
had access to thanks to crowdfunding platforms.
However, in recent years, some crowdfunding platforms such as Patreon and Substack have extended
the reach of crowdfunding to offer a way for creative people—artists, writers, musicians, or
podcasters—to sustain their creative work by receiving a steady source of income.
Popular Crowdfunding Websites
Crowdfunding websites such as Kickstarter, Indiegogo, and GoFundMe attract hundreds of thousands
of people hoping to create, or support, the next big thing.
GoFundMe
As of 2021, GoFundMe is the largest crowdfunding platform. Since GoFundMe was founded in 2010,
the site has raised over $10 billion through more than 150 million donations. 1 GoFundMe is the site
most popular for individuals seeking to recover from a medical expense or disaster such as a house
fire, natural disaster, or unexpected emergency expense. Start-up companies tend to use Kickstarter.
Kickstarter
Kickstarter is another popular choice. As of 2021, since it was founded in 2009, Kickstarter has
successfully funded nearly 200,000 projects, with more than $5.7 billion pledged across all
Kickstarter projects.2
Kickstarter is the most popular crowdfunding site for aspiring businesses hoping to raise capital and
reach a larger audience. In fact, unlike GoFundMe, Kickstarter can only be used for creating projects
that can be shared with others.
Additionally, Kickstarter cannot be used to raise funds to donate to a charity or cause, projects can't
offer incentives like equity, revenue sharing, or investment opportunities, nor can any project involve
the site's list of prohibited items such as "any item claiming to diagnose, cure, treat, or prevent an
illness or condition," political fundraising, drugs or alcohol, or any contests, coupons, gambling, and
raffles.3
Indiegogo
Indiegogo started as a crowdfunding site initially focused exclusively on raising money for
independent films but began accepting projects from any category a year after its launch in 2007.
Indiegogo is seen as a less strict and more flexible platform than Kickstarter, as it gives backers
control over whether they want fixed or flexible models—this is probably the most significant
difference between the two crowdfunding platforms. Kickstarter releases funds only after the
campaign has reached its funding goal, whereas Indiegogo allows the campaigner to receive
funding pro-rata, or wait until their target is hit.
As a campaigner, it might be easier and less risky to go with flexible funding (i.e., receiving funds as
they come); however, regardless of the amount raised, campaigners must still deliver on any promises
made. For a backer, fixed funding is more attractive as it is associated with much less of a risk.
 
Crowdfunding platform fees range from 5% to 12%. Look out for punitive fee structures before
choosing a crowdfunding platform.
Advantages and Disadvantages of Crowdfunding
The most obvious advantage of crowdfunding for a start-up company or individual is its ability to
provide access to a larger and more diverse group of investors/supporters. With the ubiquity of social
media, crowdfunding platforms are an incredible way for businesses and individuals to both grow
their audience and receive the funding they need.
Furthermore, many crowdfunding projects are rewards-based; investors may get to participate in the
launch of a new product or receive a gift for their investment. For instance, the maker of a new soap
made out of bacon fat may send a free bar to each of its investors. Video games are a popular
crowdfunding investment for gamers, who often receive advance copies of the game as a reward.
Equity-based crowdfunding is growing in popularity because it allows startup companies to raise
money without giving up control to venture capital investors. In some cases, it also offers investors
the opportunity to earn an equity position in the venture. In the United States, the Securities and
Exchange Commission (SEC) regulates equity-based crowdfunding.
Potential disadvantages of crowdfunding include the possible damage to you or your company's
reputation caused by "resorting" to crowdfunding, the fees associated with the crowdfunding site, and,
at least on some platforms, if you don't reach your funding goal, any finance that has been pledged
will be returned to your investors and you will receive nothing.
Examples of Crowdfunding
Many of the products and businesses crowdfunded on Kickstarter became very successful and
lucrative endeavors. For instance, Oculus VR, an American company specializing in virtual
reality hardware and software products, was funded through the site. In 2012, founder Palmer Luckey
launched a Kickstarter campaign to raise money to make virtual reality headsets designed for video
gaming available to developers. The campaign crowdfunded $2.4 million, ten times the original goal
of $250,000.4 In March 2014, Facebook (FB), now Meta, acquired Oculus VR for $2.3 billion in cash
and stock.5
Another example of a company that rose to success through the help of Kickstarter campaigns is
M3D, a company founded by two friends that manufacture small 3D printers. David Jones and
Michael Armani raised $3.4 million for their Micro 3D printer on the crowdfunding site in 2014. 6 The
tiny 3D printer, which comes with a variety of durable 3D inks, is now available at Staples,
Amazon.com, Inc. (AMZN), Brookstone, and elsewhere.
In April 2019, Critical Role, a weekly live-streamed tabletop roleplaying game featuring a group of
prominent voice actors, raised $4.7 million in just 24 hours for its latest animated special “The
Legend of Vox Machina.” No other 2019 Kickstarter campaign raised that amount over their entire
30- to 60-day raising period.7
What Is crowdfunding and how does it work?
Crowdfunding is the use of small amounts of capital from a large number of individuals to finance a
new business venture. Depending on the type of crowdfunding, investors either donate money
altruistically or get rewards such as equity in the company that raised the money.
Do you pay back crowdfunding?
For crowdfunding that operates on a donation basis, the company does not need to pay back investors.
However many companies offer incentives for early backers such as an advance copy of the product.