Extant literature on entrepreneurial activities by companies evidences their significant role in economic growth, enhancing innovation, and creating jobs (Estrin et al., 2018, p.425-26). However, realizing the opportunities and benefits accrued from entrepreneurial activities may fail due to the lack of funding. Funding is the foundation on which every start-up thrives, without which it will fail. According to Garg and Shivam (2017, p.22), start-ups normally fail because they run out of capital, experience working impediments resulting from demographic or bureaucratic reasons, the lack of resources, or the failure to meet targets. Either way, funding plays a critical role as a determinant of success or failure of a business, which is why entrepreneurs need to evaluate underlying issues that would cause the start-up to fail so that they can effectively manage their funding. The same applies to lenders as they determine whether they are making meaningful investments and whether the start-ups will effectively and efficiently utilize the finance provided to ensure sustainable growth. It is especially critical for start-ups in the early stages of growth as they struggle to demonstrate their legitimacy into transitioning from conceptualization to commercialization (Islam et al., 2018, p.36). The current report discusses early-stage funding using crowdfunding and why it would be the most appropriate funding strategy for the business. It does so by establishing the strategies used by lenders to invest, the value it will have on the business, and why it is more appealing than other funding sources.  

Literature Review

Funding Options

Start-up businesses have multiple options to choose from when it comes to financing their entrepreneurial activities. The traditional form of financing by entrepreneurs takes place in steps, whereby they will rely on personal savings, investment from friends and family, seeking support from angel investors, before turning to venture capital, banks or equity markets (Estrin et al., 2018, p.426; Klačmer Čalopa et al., 2014, p.25). Bank loans are the oldest formal sources of finance. However, they involve complex procedures and depend on an individual’s credit history and assets, which makes it difficult for young individuals – entrepreneurs of most start-up businesses – to obtain a loan. Seed investments also contribute to the growth of a start-up and usually are from investors looking to invest in businesses with a favourable return on investment. Angel investors provide skills, expertise, and networking to help stagnating business realize a profit, create business activities, and create new value. Venture capital investments or risk capital investments can come from individuals, companies, or funds interested in the development of individual companies (Klačmer Čalopa et al., 2014, p.26-29). 

Entrepreneurs have recently begun using equity crowdfunding (ECF), which is an innovation in the early stage of the entrepreneurial finance space (Estrin et al., 2018, p.426). In the most general sense, crowdfunding refers to the process of raising funds by tapping the general public, which mostly occurs through the internet. The financial resources sought can either be on a donation basis or in exchange for some reward or equity voting rights in the company (Estrin et al., 2018, p.426; Tomczak and Brem, 2013, p.338). Crowdsourcing serves as seed money in situations where the 3Fs (Friends, Family, and Fools) are unavailable or insufficient, or where the amounts required are too insignificant for angel investors and venture capitalists. The use of crowdfunding does provide additional benefits for raising seed money at the early stages for start-up growth and can fill these financing gaps until the start-up business achieves sustainable liquidity (Tomczak and Brem, 2013, p.336). The benefit of using crowdfunding is that it provides entrepreneurs with flexibility in terms of who engages their business idea, attracting more people interested in funding creative ideas using private savings. 

Lender Investment Strategies and Structures

Generally, there are three different modes that lenders of the crowdfund can choose to provide lending for start-ups. Passive investment is the first mode of investment, where the lending party does not seek influence over the activities of the start-up (Tomczak and Brem, 2013, p.348). Investors have no active involvement in passive investment crowdfunding as their only role is to provide financing activity. The second mode is an active investment, which is the complete opposite of the passive investment. An investor pursuing an active investment for crowdfunding seeks active participation in the company’s project and directly influences the overall outcome of the start-up. Start-ups mostly prefer using active investment lenders in crowdfunding as they often have organizational structures in place to allow investors to provide an active voice in the direction of their efforts (Tomczak and Brem, 2013, p.349). The final mode is donation-based, where the investor donates their money to the crowdfunding initiative. The donation, in this case, does not attach it to it any expectation of a tangible return. If there are financial returns of any sort, then they come out as secondary concerns. Investors using this form of crowdfunding lending are mostly in it for the social reputation or enjoy the private benefits from participating in the initiative’s success (Tomczak and Brem, 2013, p.349). 

In addition to the decision regarding management involvement by lenders and investors in crowdfunding, the cost associated with the investment is also a critical determinant of lending decisions. The cost consideration aspect of the lending process refers to the lender’s cost-benefit evaluation of the investment opportunity. Cost-benefit analysis refers to the cataloguing of the impacts of a given decision as benefits (pros) and costs (cons), valuing the impacts in dollars (assigning weights), and then determining the net benefit of the proposal relative to the current initiative (Boardman et al., 2018, p.2). The cost consideration in crowdfunding refers to the net benefit accrued from lending money to the start-up at the time of exit. Based on the forms of the investment strategies available to an investor, the net benefit can either be in financial form, social reputation, or personal fulfilment. For active and passive crowdfund lenders, a return on investment would be in financial terms. Hence, investors must consider the rate at which benefits accrue based on the amount of investment injected. For the donation-based investors, the investor must evaluate how much the investment will impact their social reputation and whether they will experience self-fulfilment during exit.

Another way of determining an investment strategy by a lender is to evaluate the value-creation potential of the start-up. Most individuals taking part in crowdfunding ted to shy away from complex business evaluation techniques such as analysing business plans, cash-flow liquidity, and collateral as they are not sophisticated investors (Meyskens and Bird, 2015, p.162). Some of the value-creation types that lenders may consider before lending their money include customer value, product value, people value, service value, image value. The research by Liang et al. (2020, p.4) identified service and image value as being significant indicators of funding success, while the product and people value contribute to funding success to a lesser extent. Monetary value, however, had an insignificant contribution to the funding success of the venture. However, the perceived value of the start-up may also depend on the stage at which the company is in and will significantly influence the type of crowdfunding lending. For example, Paschen (2017, p.182-83) identified three stages in the growth of a start-up: pre-start-up, start-up, and growth. Each of the three stages has a preferred form of crowdfunding. The pre-start-up phase would benefit more from donation crowdfunding since the risk of failure is high at this stage, and the lender should not have high expectations. The start-up stage is more suitable for lending crowdfunding, as the start-up is in a better position to offer tangible rewards to its lenders, and lenders can forecast possible outcomes given the current traction of the business. Equity crowdfunding is appropriate during the growth stage of the start-up as it is better capable of providing the high capital necessary for scaling and growing the business (Paschen, 2017, p.182-83). 

Crowdfunding Value at Exit

Investments made through crowdfunding will be subject to dilution when the company raises additional capital at a later date and issues new shares to the investor (Jenik et al., 2017, p.18). According to Paschen (2017, p.183), the growth phase of the start-up is important as it provides the founder with flexibility as to what happens to the business or venture in the future. The equity crowdfunding, or alternatives, raised at this stage help support further growth of the business, help the start-up acquire another company to achieve scale, or provide liquidity and an exit for the founder. Illiquidity poses a major risk for crowdfunding, and available options for exit are limited. In the absence of a secondary market, entrepreneurs may either sell their position over the counter to any interested party, can choose to wait until another strategic investor acquires the company, merges the business with another, or issues an IPO (Jenik et al., 2017, p.18). Ideally, lenders can exit from the investment after realizing their return on capital invested, or otherwise. However, their contribution towards the company is in helping them achieve growth and access to more elaborate financing methods as a result of its growth. Crowdfunding will have helped improve the bargaining position of the company at the time of exit from other interested parties looking to invest in the company. 


Jenik et al. (2017, p.18) note that crowdfunding as a source of funding will benefit the business in that it associates with limited liability, has a global reach, and improves the investment’s attractiveness. In case of default, the business does not bear the burden of unlimited liability for unpaid debts. The funders, as well as the business, will take the hit. In addition to this, crowdfunding provides unlimited access to funders from across the globe. It also increases the chance of acquiring finance due to the large pool of potential investors. Finally, successful crowdfunding campaigns will serve as a signal for the more well-established investors of the potential the business holds. Other benefits that accrue to a business utilizing crowdfunding strategies include the support derived from user-generated innovation as people provide their feedback on refining a product or service, forecasting the success or failure of business early to prevent bad investments, and marketing (Paschen, 2017, p.181-82). Crowdfunding offers flexibility and autonomy that most other sources of finance do not provide, especially with how lenders can take part in the investment. The lack of rigidity is beneficial in that the company can choose the type of investors they would want to have onboard as long as they have approval.


The current strategy explores financing options for start-ups, with the goal being to recommend a suitable strategy for start-ups during the early-stage growth phase. During this stage, business ideas are quite risky, and shifting them from conceptualization to commercialization can be challenging. Capital lenders tend to shy away from high-risk ventures, especially those without a performance history and trajectories they can use to inform decisions. Crowdfunding offers multiple options for lenders to investors, with some strategies not requiring any tangible return on investment, which is ideal for a start-up business. 


Boardman, A.E., Greenberg, D.H., Vining, A.R. and Weimer, D.L., 2018. Cost-benefit analysis: concepts and practice. Cambridge University Press.

Estrin, S., Gozman, D. and Khavul, S., 2018. The evolution and adoption of equity crowdfunding: entrepreneur and investor entry into a new market. Small Business Economics51(2), pp.425-439.

Garg, A. and Shivam, A.K., 2017. Funding to growing start-ups. Research Journal of Social Sciences10(2), pp.22-31.

Islam, M., Fremeth, A. and Marcus, A., 2018. Signaling by early stage startups: US government research grants and venture capital funding. Journal of Business Venturing33(1), pp.35-51.

Jenik, I., Lyman, T. and Nava, A., 2017. Crowdfunding and financial inclusion. CGAP (Consultative Group to Assist the Poor) working paper.

Klačmer Čalopa, M., Horvat, J. and Lalić, M., 2014. Analysis of financing sources for start-up companies. Management: journal of contemporary management issues19(2), pp.19-44.

Liang, X., Hu, X. and Jiang, J., 2020. Research on the Effects of Information Description on Crowdfunding Success within a Sustainable Economy—The Perspective of Information Communication. Sustainability12(2), p.650.c

Meyskens, M. and Bird, L., 2015. Crowdfunding and value creation. Entrepreneurship Research Journal5(2), pp.155-166.

Paschen, J., 2017. Choose wisely: Crowdfunding through the stages of the startup life cycle. Business Horizons60(2), pp.179-188.

Tomczak, A. and Brem, A., 2013. A conceptualized investment model of crowdfunding. Venture Capital15(4), pp.335-359.