Difference Between Investors and Crowdfunding

When starting a new business as an inventor or startup founder, funding is one of the primary concerns that needs to be considered. Establishing whether or not your product has market appeal goes hand in hand with securing funding. It is no wonder that so many inventors stress over evaluating their new invention’s market appeal, especially when entering the product design and retail business sector.

One of the main reasons for this concern is that, as a new product business owner, you want to ensure the stability of your business within your market of choice by having a product that will generate profit and succeed in the long term.

With such vast competition in the market, including large, omnipresent corporations and brands, securing the requisite funding and consumer interest to do this is vital. Most businesses with no concrete backing are likely to struggle when striving to achieve sustainable growth and may fail.

Businesses have enduringly turned to investors for financial and advisory support. In recent years, crowdfunding has also become a popular method to help fund a new business venture. But what are the major benefits and differences of these two funding methods?

Keep reading to learn everything you need to know about investors and crowdfunding and how each avenue can help your business flourish!

What is an Investor?

As the name suggests, investors refer to a person or group of people who invest their money and interest into your product, service, or business because they see the opportunity for growth and value in your business.

Investing is essentially equity-based crowdfunding, where individuals invest in a startup or new business and receive shares of that business’ profit in return. Each person that invests in your business or startup, becomes a shareholder and, thus, benefits from any business achievements attained, from sales to large investors.

Many investors invest in new businesses or startups simply because they want to help a business that they believe is driven by a truly good mission and offers an exceptional product or service. As a result, they would like to see the business flourish and expand. Other investors simply invest purely for financial gain and are looking to make a great profit.

Pros and Cons of Investors

Pros

One of the core benefits of using investors to fund your product business is that you receive guidance on structuring and scaling your business. Investors typically have years of experience identifying businesses with immense value under their belt. Capitalize on this!

If you have an experienced investor, it is best to leverage their insight, industry knowledge and any past experiences they have amassed while navigating the startup realm. They may offer proven tips and strategies that can inform you as a new business owner.

An additional reason you may want to secure funding through an investor is that there is less risk in repayment in case your business does not take off as projected or fails completely. Unlike bank loans, investors don’t operate under huge legal requirements. This means any debt you’d have to repay in a worst-case scenario wouldn’t be as looming and severe as a bank loan.

Finally, another benefit of investors is that they afford opportunities to broaden your network, which is incredibly important for a novice startup founder or inventor. Most investors are well-connected in the business sector and often have developed vast professional networks, including other investors, manufacturers, distributors, reporters, and marketing professionals.

Cons

Although there are many benefits to having investors supporting your product business, there are also a few disadvantages to take into consideration.

One aspect that a business owner must consider before going the investor route is that the more investors there are, the less control over the scope of your business you will have. Every piece of equity relinquished in the form of shares decreases your control over how your business develops.

As such, it’s important to do extensive research into an investor before agreeing to a deal or partnership so that you have a comprehensive understanding of their background experience and past professional involvements. You want to know who you are getting into business with! This will ensure that you introduce someone you trust to your venture who sees the same vision for your business that you do.

Another disadvantage of funding your business through investors is that it can add extra pressure on the business or start-up owner. As an owner, it’s imperative that you make sure you have a product or service market fit and a great business model in order to garner the attention of investors and keep it.

In general, it’s also a long and tedious process to acquire investors due to the amount of time, energy, and perseverance that one has to expend in order to enlist a reliable team of investors that will truly help your business grow.

What is Crowdfunding?

Although similar in concept, crowdfunding and investors are very different. Crowdfunding entails a diverse and often widespread group of people individually choosing to finance a project that is either charitable or artistically innovative, typically through an online platform.

With most crowdfunded projects, those who choose to help with funding know that there may not be a monetary reward for their financial support. Therefore, crowdfunding can be compared to receiving donations. They help others realize their project vision and make their dreams come true!

Conversely, many startups and business owners do offer “rewards” in the form of merch or a beta version of the product itself once it is very close to mass production to show their appreciation for the support given by those who pledge.

Today, there’s a wide range of well-known crowdfunding sites that have rapidly grown in popularity, as many new startups and businesses look to crowdfunding to gain financial support to kickstart their projects and validate the need for their product or service. Two of the most popular and reliable crowdfunding sites are Indiegogo and Kickstarter.

Pros and Cons of Crowdfunding

Pros

There’s a reason so many new business owners and inventors are turning to the crowdfunding community to launch and grow their startups! Here are a few primary ones.

One of the most compelling and well-known benefits of gaining financial support through crowdfunding is the all-important validation you can attain when people invest. It solidifies the fact that a group of people are interested enough in your business or product to spend their money on it.

If you can gather a substantial amount of financial support through a crowdfunding site, you will have not only the necessary financial help to start your business but also tangible proof that there is a market segment interested in what you have to offer, which you can leverage with other potential investors.

Another fantastic benefit of crowdfunding is that it is a clever tactic for gaining exposure and publicity for your new business. If your project becomes popular, it can help build strong customer relationships and a community of people who are excited to see your business grow early on.

Finally, one of the best benefits of crowdfunding is that there are zero equity requirements. Business owners and inventors keep 100 percent of their equity in their venture in addition to what they gain through crowdfunding.

Cons

Although the list of disadvantages for crowdfunding is small, there are still a few ways in which crowdfunding could negatively impact your business’ future.

One thing to remember about crowdfunding is that if your business is planning to sell its products or services to other businesses – B2B – crowdfunding may not be the right route for you. This is because crowdfunding is more of a personal choice made by each individual rather than on behalf of a business.

Another challenge that a business could face if deciding to secure funding through a crowdfunding site is trying to properly market its crowdfunding efforts. While crowdfunding can be extremely beneficial in terms of exposure and visibility, it is not a sure thing.

Your brand messaging has to be strong and targeted, so if your marketing knowledge isn’t advanced and you don’t have a marketing professional on your team, it may be difficult to grab people’s attention on these platforms.

Finally, a significant downside to crowdfunding is that most crowdfunding sites state that you must set a funding goal for your business or startup. In the event that you don’t reach this goal, the pledged amount will be returned back to those who invested, which results in a waste of your efforts and time spent.

MAKO Client Case Study: Moonlite

As MAKO Design + Invent is a leading product design and development firm that caters our services specifically to home inventors and small startups, it’s not uncommon for us to see inventors we work with pursuing crowdfunding or investors to help fund their projects!

One of our most successful clients started their venture with Kickstarter campaigns that not only helped fund the development and creation of their product but also gave them major publicity and allowed them to build excitement for their initial product lunch!

Inventor Natalie Rebot approached MAKO with the idea for Moonlite, a children’s product where you can project stories through your phone’s flashlight and read with your kids! While we thought the idea was genius and immediately began the concept design sketching phase, Natalie used Kickstarter to help gain support for her inventive product business.

Natalie was met with immense support from users who wanted to see this product come to life and even purchase it for themselves. She was able to fully fund the production of Moonlite by reaching her fundraising goal! What a fantastic success story.

If you have a great new invention and you’d like to learn more about this process, get in touch with MAKO today and visit our website to find out more. Or feel free to give us a call at 1-888-806-MAKO, and we can set you up on a call with our product strategist!

About: MAKO Design + Invent is the original firm providing world-class consumer product development services tailored to startups, small manufacturers, and inventors. Simply put, we are the leading one-stop-shop for developing your physical product from idea to store shelves, all in a high-quality, cost-effective, and timely manner. We operate as one powerhouse 30-person product design team spread across 4 offices to serve you (Austin, Miami, San Francisco, & Toronto). We have full-stack in-house industrial design, mechanical engineering, electrical engineering, patent referral, prototyping, and manufacturing services. To assist our startup and inventor clients, in addition to above, we help with business strategy, product strategy, marketing, and sales/distribution for all consumer product categories. Also, our founder Kevin Mako hosts The Product Startup Podcast, the industry's leading hardware podcast. Check it out for tips, interviews, and best practices for hardware startups, inventors, and product developers. Click HERE to learn more about MAKO Design + Invent!