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Crowdfunding Vs. Traditional Funding

One must completely understand the difference between the two ways of funding before deciding which one will work best for setting up a business. This Buzzle article will delve on the new-age financial debate of crowdfunding vs. traditional funding.
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Crowdfunding vs traditional funding
Quick Tip
It is advisable that you raise seed capital through crowdfunding, but resort to traditional investors for any further funding requirement.
Crowdfunding has become the new buzz word for raising capital. It is no longer restricted to just products, but it also involves services, film-making, book writing and publishing, community ventures, music, games, art, etc. Crowdfunding gives an entrepreneur the right platform not only for generating funds but also marketing his/her idea. It allows people to know about a business even before it is launched.

However, in comparison to the traditional funding options, crowdfunding lacks on many fronts. One such problem area is maintaining secrecy. As you make your idea public, there is nothing unique left about it, and people can replicate the idea immediately. Also, once an entrepreneur collects the crowdfunding money, he/she is practically on his own, and will not receive the guidance of seasoned traditional investors.

Here are few points that will clearly tell you the difference between crowdfunding and traditional funding.

Crowdfunding Traditional Funding
It allows you to collect funds for a new business online, through a large number of investors. Crowdfunding can be found on websites like Kickstarter, Indiegogo, RocketHub, Peerbackers, etc. Traditional funding sources like loans from banks, financial institutions, grants, angel investors, venture capitalists, SBA, etc., help fund new and developing businesses.
Finding Investors
Finding investors is relatively easier. It requires time and effort to persuade investors to invest in a venture.
Validation
Provides a sense of validation of the workability of the product or service by a number of people. It does not provide scope for any kind of validation.
Background Work
You will have to post video links, information, social media links, etc., describing how innovative and interesting your venture is. You will have to provide necessary financial records, business plan, guarantees, etc., for the loan to be sanctioned.
Networking
It provides a vast platform to network with people. You only get an opportunity to network with a limited number of people.
Technical Ideas
It will not work if you have complex and highly technical ideas which people may not understand easily. No matter how complicated your business idea, if it has profit potential, you will get the funding.
Market Information
As you introduce the product to many people at one go, you will get valuable information regarding market research and feedback. Traditional funding options do not provide any kind of information about market research and feedback.
No Backers
Chances are that you may not receive any kind of support if the idea does not seem viable. Once the authorities are convinced that your project will work, your funding is guaranteed.
Maximum Amount
The maximum amount one can raise cannot exceed USD 1 million in a 12-month period. There are no such restrictions on raising capital.
PR and Marketing
In order to get donors, you will have to create a PR and marketing splash even before you make the idea popular with the public. You don't need any PR and marketing activities for getting your funds sanctioned.
Investor Orientation
Here, investors are generally motivated by an innovative idea which they can identify with. Hence, if you have a click-able business idea, it will easily fetch funding. Traditional investors are driven by revenue generation, profit potential, expansion and workability of the idea.
Theft of Idea
You run the risk of making your unique idea public. Your information is often safe with the funding authorities.
B2C
Ideally suited more to B2C businesses rather than B2B businesses. This type of funding is suitable for all types of businesses.
Raising Capital
It is ideal for raising seed capital, which is generally less than USD 100,000. Here, there is no such limitation, and you can raise both small and large capital.
Result Orientation
Backers like to see immediate results and will not wait for a slow R&D process. Traditional backers will allow you the leverage, the R&D process, and will wait for the regular business cycle.
After Campaign
Once the campaign is over, the data remains on the crowdfunding website and you can always update it with latest information. This can act as a great marketing tool. There is absolutely no scope for marketing through the traditional funding process.
Patents
It is highly advisable that you register for patents with date/time stamps before you introduce the idea/project. There is no need for filling patents as in most cases, your idea will remain guarded.
Reputation
As you go public to collect funds, your reputation will suffer badly if you fail to achieve the goals set by your campaign. As only a few individuals are aware about your venture, failure will not damage your reputation extensively.
Return on Investment
Here, investors will have to be given impressive gifts and perks against the contribution made by them. They will get interest, part of equity in your company, or position on the board of directors, etc.
Advice
Though this will give you an existing market for your business idea, there will be no one to guide you for taking your venture to new heights. On the other hand, traditional investors have the necessary experience and knowledge in your business. They will guide you to take the right business decisions.
Lack of Time
No time to test your product, and if there are drawbacks, they will become public easily, your support may dwindle. Investors will advice you to test the product and only then introduce it in the market.
In Case of Loss
Even if you business idea fails, you are still obligated to fulfill the rewards and perks promised to your backers during the campaign. If you face losses, traditional investors will work out a way to help you.
Business Control
The control of the business will remain in your hands and the investors will not enforce their decisions on you. The control is shared along with the investors, and they may override your decisions if they think it is not in the best interest of the business.

Traditional investors not only bring funding to the business, but they also contribute valuable industry experience, expertise and contacts. Now that you know about the difference between crowdfunding and traditional funding, choose your option wisely. Remember there are certain SEC rules and regulations which you should know about before you resort to crowdfunding. There are certain provisions for the crowdfunding under the Jumpstart Our Business Startups Act (JOBS Act), which you should read in order to get more information about the same.
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Published: February 10, 2014
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