Attracting and engaging investors is what an equity crowdfunding campaign is all about. So what are investors looking for? What makes the difference in their decision whether to invest or not? The answers to these questions depend a lot on their motivations.
It helps to explore the different types of crowdfunding investors and the factors that play into their decision-making. Here are some of the things you can do to improve your chances of a successful crowdfunding campaign.
Retail investors versus sophisticated investors
Broadly speaking, you can categorise crowdfunding investors into two types: retail and sophisticated. Retail investors are investing more emotionally, basing their decision on the cause or brand, or because they know the people involved.
Sophisticated investors typically invest more than retail investors, but the amount they invest doesn't necessarily reflect their level of sophistication. A sophisticated investor can be either a private individual or an institution - they tend to exhibit the same characteristics.
While it's definitely more a spectrum than two clearly divided camps, there are some common identifying features:
- Retail investors = heart-first. Sophisticated investors = head-first
- A retail investor will go with a gut decision. A sophisticated investor will have a formal process for appraising opportunities.
- Retail investors make their investment decisions based on emotional attachment. Sophisticated investors made decisions based on rational reasoning.
- Retail investors will typically look for reasons to invest. Sophisticated investors are looking for excuses not to invest.
- Retail investors are (or at least should be) gambling some of their disposable income. Sophisticated investors view crowdfunding as one of the riskier assets in their diverse portfolio.
- Retail investors want to be part of a journey, to tell their friends they're involved. Sophisticated investors are investing only to make a return.
You'll have noticed that I didn't talk about their level of investment. That's because, in reality, I don't think it matters. I've seen a retail investor put more than £150,000 into a company without even requesting the business plan. Equally, I've known a number of investors on both Seedrs and Crowdcube to exhibit all the signs of a sophisticated investor, but only invest in the low hundreds.
Some vocal critics of crowdfunding have claimed that retail investors shouldn't exist at all. I find this view incredibly patronising. Firstly, as long as you are aware of the risks, then it's your money to do with as you will. Secondly, I've seen many well-managed and institutionally-funded companies still go on to fail.
And the crowd has proven it has greater foresight than you'd think. It turns out that the major crowdfunding platforms have similar success rates to venture capital funding. The data suggests that the crowd is often as good at predicting the future success of a company as professional analysts. It's not surprising, really. The crowd is representative of the market, and crowdfunding is akin to the market voting with their cash for their favourite ideas.
What can you do to stand out to investors?
Even better, if you can organise a consumer marketing and PR campaign to hit at the same time as your crowdfunding campaign, you'll be able to update investors with your progress in real time. Having a buzz about your company during your raise will drive retail investors to your campaign, and give sophisticated investors confidence in your forecasts.
What will turn crowdfunding investors off?
There are some faux pas that you need to avoid, as they can quickly turn off either category of investor. These include:
- Not including a financial model. Retail investors want to see that you've done your homework. Sophisticated investors will want to scrutinise your assumptions and check if you will still make money even if you don't hit your targets.
- Not answering questions openly. I've seen campaigns stall completely because a founder refuses to answer a question. At best, it makes you seem unprepared; at worst, untrustworthy.
- Not making yourself available. Appear in your own video, no matter how shy you are; have an open office, investor event or webinar. Investors are investing in you, and want to know you're not trying to hide from them.
- Not doing your homework. Find out who your competitors are, how big your market is and how much penetration you're likely to achieve.
Passion versus profit investments
We're living during an exciting time in history. We're starting to see the potential for many of the world's problems to be solved by innovative start-ups powered by the crowd - projects that, for example, recycle plastic into oil, or that use stem cells to regenerate damaged heart muscles.
These are known as passion projects, or passion investments. They're exciting, they're world-changing, and they're predominantly supported by retail investors.
But, I believe, companies that can attract the full spectrum of retail investors and sophisticated investors have the best chance of success. Not only do businesses need savvy investors, they need people who feel passionately about their cause.
The good news is that all companies can make efforts to appeal to both kinds of investor. Solid financial forecasts and world-changing ideas can combine to create projects that are full of passion and generate a good return.
Sponsored post. Copyright © 2018 John Auckland, crowdfunding specialist and founder of TribeFirst