A new hope? Crowdfunding vs. Traditional Finance

Promotional graphic for KoreConX comparing crowdfunding vs. traditional finance.

Introduction

Launching a startup is no walk in the park. It’s like diving headfirst into a wild roller-coaster ride filled with ups, downs, and unexpected twists. It’s a path riddled with obstacles, risks, and often, daunting odds of failure. According to the Bureau of Labor and Statistics, a staggering 50% of new businesses fail to survive beyond their fifth year. Yep, it’s tough out there.

But, there’s a shining beacon of hope on the horizon, and it goes by the name of investment crowdfunding or equity crowdfunding or online capital formation. According to CCLEAR in “The Investment Crowdfunding 2024 Trends Report”, startups that get their funding through this method have a better shot at survival, with only about 17.8% of them crashing and burning.

Scroll down to dive deep into the world of equity crowdfunding. We’ll unpack what it’s all about and how it’s giving startups a fighting chance in this crazy entrepreneurial jungle.

Crowdfunding vs. traditional finance: Understanding the Landscape

Traditional Business Financing and Its Challenges

Traditionally, startups have relied on a mix of personal savings, bank loans, and venture capital to get off the ground. Each of these funding sources comes with its own set of challenges. Bank loans often require collateral and a proof of revenue, both of which new businesses might lack. Venture capital, while lucrative, is highly competitive and may demand significant control over the company’s direction.

The Rise of Investment Crowdfunding

On the other side is the investment through crowdfunding, a product of the digital age. This way of getting funds allows entrepreneurs to raise capital directly from the public through online platforms. We can say that crowdfunding democratizes the fundraising process, removing the barriers of traditional financing methods. And more, it allows startups to tap into a broader base of potential investors.

Analyzing the Statistics

General Business Survival Rates

The Bureau of Labor and Statistics’ report that 50% of all new businesses fail within 5 years. This is a sobering reminder of the volatile nature of entrepreneurship. The high rate can be attributed to different elements, including lack of market need, cash flow issues, and fierce competition.

Success in Investment Crowdfunding

However, the recent report by CCLEAR highlights that only 17.8% of companies that got capital through equity crowdfunding have gone out of business. This statistic suggests that equity crowdfunding doesn’t just offer a financial lifeline, but also contributes to a more sustainable business model for startups.

Why Equity Crowdfunding Works

Community and Engagement

One of the key strengths of equity crowdfunding is the community engagement it fosters. Investors are often customers or enthusiasts of the product or service, offering not just capital but also support, feedback, and word-of-mouth promotion. This engaged community can be a significant asset for a new business, driving its initial growth and establishing a loyal customer base.

Flowchart about why equity crowdfunding works
Validation and Market Fit

Raising capital through crowdfunding also serves as a market validation. Successfully funded projects demonstrate a clear demand for the product or service. This allows businesses to adjust and refine their offerings based on real user feedback. It’s like a direct line to the market, which can help startups navigate the initial stages more effectively, reducing the risk of failure.

Flexibility and Control

Unlike traditional financing methods, crowdfunding provides startups with more control over their destiny. By setting their own terms for investment, businesses can maintain control over their direction and culture, which can be crucial for long-term success.

Challenges and Considerations

While investment crowdfunding presents a promising alternative to traditional financing methods, it has some challenges. Along the path, the entrepreneur will come across rigorous regulations to get permission to go live with their offer.  Another point that might be present is the pressure to deliver results to a large group of investors, but it’s not an exclusivity of the crowdfunding method to get money for your business. 

After all the sheer effort to get the documents and correspond to the regulatory obligations, there’s another big challenge. The choice of a reliable crowdfunding platform. This is a decisive point in every offer, because if the platform isn’t compliant or safe, all your efforts can go down the drain. So, since compliance is mandatory, it is essential to make a wise choice when it comes to finding a company to launch your offer. 

KoreConX powers the most trustworthy crowdfunding platforms in the market. Our secure, All-In-One Platform gives the private market ecosystem the ability to compliantly manage corporate records, captable, funding activities, shareholders, and investors —while efficiently taking advantage of innovative capital-raising opportunities. KoreConX’s processes and actions are led by one key value: TRUST.  It’s in the DNA of the company.

The contrast between the Bureau of Labor and Statistics’ general business survival rates and the success rate of businesses funded through investment crowdfunding is striking. It sheds light on the evolving landscape of startup financing, where investment crowdfunding emerges as a viable and potentially more sustainable option for entrepreneurs. By leveraging the power of community, market validation, and greater control, startups can significantly increase their chances of survival and success.

As the business world continues to evolve, it will be interesting to see how investment crowdfunding develops and what it means for the future of entrepreneurship. The journey is certainly not without its challenges, but for many startups, crowdfunding may just be the key to unlocking their full potential.

 

Bibliograpgy

* CCLEAR. “The Investment Crowdfunding 2024 Trends Report.” cclear.ai, 2024.