Where Does Funding Come From? A short guide to Crowdfunding, Angels Investors, and Venture Capital

Hello

Today, we’re diving into the world of funding. Whether you’re an aspiring entrepreneur, a creative mind with a big idea, or someone curious about how businesses get off the ground, understanding funding is 🔑 to navigating the startup ecosystem.

For me it was always difficult to conceptualize this idea. I knew all these are similar yet different but never really knew the exact differences. Alas, I took it upon myself to write it down to drill it into my head.

I hope I remember it for life now! Let’s break it down!

Crowdfunding: Power to the People

Crowdfunding was a great growth lever that unlocked the way ideas and projects get funded. Instead of relying on a single source, that took forever to reach out to and then forever to convince, crowdfunding opened a new way for founders to raise money from a large number of people, often in small amounts, through online platforms.

Types of Crowdfunding

There are essentially 3 subcategories within this category;

1. Reward-Based Crowdfunding (e.g Kickstarter, Indiegogo)

   • How It Works: Backers contribute money in exchange for rewards, like early access to a product, exclusive merchandise, or a personalized thank-you note.

   • Key Feature: You don’t give up equity in your company. It’s all about pre-selling your idea or product.

2. Equity Crowdfunding (e.g., Crowdcube, SeedInvest)

   • How It Works: Investors contribute money in exchange for equity (shares) in your company.

   • Key Feature: This is a great way to raise capital while giving backers a stake in your success.

3. Donation-Based Crowdfunding (e.g., GoFundMe)

   • How It Works: People donate money without expecting anything in return. This is often used for personal causes, nonprofits, or community projects.

   • Key Feature: It’s all about generosity and supporting a cause or vision.

Angel Investors: The Early Believers

Think of an angel investor of a person just exactly like me. Lol, just kidding.

Angel investors are wealthy individuals who invest their own money into early-stage startups. They’re often the first to believe in your idea when it’s just a spark. So these people are likely to be mission and vision driven. More than the startup itself, they are investing in a dream, in a vision, in a set of founders they believe in.

So, what do Angel Investors typically do?

Smaller Investments: The investments they make are usually small. Small is always relative but the ticket size usually ranged from $10,000 to $100,000.

Mentorship and Connections: Angels often bring more than just money. They offer guidance, expertise, and access to their professional networks.

Early-Stage Focus: They usually are early (super early) investor, even if they come with higher risks.

Note: Angel investment DOES NOT mean they don't take equity. They most definitely so. Sometimes even higher than a VC in terms of Equity to Dollar ratio. Their downside is limited to their ticket size but the probability of downside is also significantly higher and therefore more equity in percentage terms.

don't be fooled just because it has the word angel - Riz Proverb

Venture Capital (VC): Fuel for Growth

Vee Cee, You Cee, Vee All Cee

Venture capital firms are the heavy hitters of the funding world. They invest large sums of money into high-growth startups with the potential to scale rapidly.

Key Features of Venture Capital

• Larger Investments: Typically $1 million or more.

• Focus on Scaling: VCs help startups grow quickly, expand into new markets, and dominate their industries.

• High Expectations: VCs are looking for significant returns (think 10x or more) and often take a seat on the company’s board to influence decision-making.

Should All This Matter to You?

Maybe it shouldn't. No harm in educating ourselves, no?

Understanding the different types of funding can help you make informed decisions about how to bring your ideas to life, if you are planning to fund one!

So whether you’re launching a creative project, building a startup, or supporting a cause, there’s a funding option tailored to your needs. And if you are not thinking of launching, maybe you should somewhere down the line. Great things about us Hoomans is that we've ideas in the little brain of ours all the time. Some inspiration might be what's needed to get that push. And off we would be to changing the world.

Anyways, summarizing

1. Crowdfunding is perfect for testing the market and building a community around your idea.

2. Angel Investors are ideal for early-stage startups that need both capital and mentorship.

3. Venture Capital is the go-to for scaling quickly and achieving massive growth.

Final Thoughts

Funding is more than just money. It’s about finding the right partners, right resources, and right opportunities to turn your right vision into a right reality. By understanding where funding comes from, you can take control of your financial journey and make smarter decisions for your future.

Stay financially fit,

Riz