By John Auckland, TribeFirst.
What are investors looking for when deciding whether to invest in an equity crowdfunding campaign? What makes the difference in their decision to invest or not? The answers to these questions depend a lot on their motivations behind investing via crowdfunding.
Here I will explore the different types of investors and the factors that play into their decision making. If you’re planning an equity crowdfunding campaign, I can reveal some of the things you can do to improve your chances of a successful outcome.
Retail Investors and Sophisticated investors – what’s the difference?
In general, you can catagorise investors into two types: retail investors and sophisticated investors.
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, contrary to popular belief, the amount they invest doesn’t necessarily reflect their level of sophistication. For the purposes of this comparison, 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 want to be part of a journey, to tell their friends they’re involved / Sophisticated investors are investing only to make a return.
- Retail investors = heart first / Sophisticated investors = head first
- A retail investor will go with a gut decision / A sophisticated investor will have a process for appraising opportunities.
- Retail investors make their investment decisions based on their emotional attachment / Sophisticated investors made decisions based on their rational attachment.
- 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 will typically look for reasons to invest / Sophisticated investors are looking for excuses not to invest.
Now, I didn’t talk about their level of investment. And 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 regularly only invest in the low hundreds.
Some of the 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. Who are they to tell you how you should spend your money? Secondly, I’ve seen many well-managed and institutionally-funded companies still go on to fail. Risk exists everywhere. But is it any less noble to invest in something because you believe in the idea, rather than investing simply to make a profit?
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 as typical VC funds. 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.
How to stand out in the crowd?
Now that you know a bit more about your audience, what can you do to make sure you appeal to both kinds of investors?
Firstly, you can go into your campaign with your company in an already healthy state. You should be able to prove that there’s market interest in your idea and you’re already able to generate sales.
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 investors off?
There are some faux pas that you need to avoid entirely as they can quickly turn off either category of investor. These include:
- Not doing your homework. Find out who your competitors are, how big your market is and how much penetration you’re likely to achieve.
- 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 still make money even if you don’t hit your forecasting targets.
- Not answering questions openly on the public forum. 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 during the campaign. 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.
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 being solved by innovative startups that are powered by the crowd, projects that, for example, recycle plastic into oil, or that use stem cells to regenerate damaged heart muscles.
These startups 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.
The question is, how will your business attract both passion- and profit-led investors?
ABOUT THE AUTHOR
John Auckland is a crowdfunding specialist and founder of TribeFirst, a global crowdfunding communications agency that has helped raise in excess of £4m for over 20 companies on platforms such as Crowdcube, Seedrs, Indiegogo and Kickstarter. TribeFirst is the world’s first dedicated marketing communications agency to support equity crowdfunding campaigns and the first in the UK to provide PR and Marketing campaigns on a mainly risk/reward basis. John is also Virgin StartUp’s crowdfunding trainer and consultant, helping them to run branded workshops, webinars and programmes on crowdfunding. John is passionate about working with start-ups and sees crowdfunding as more than just raising funds; it’s an opportunity to build a loyal tribe of lifelong customers.