Crowdfunding is a new source of entrepreneurial finance allowing a wider audience to invest in startups for equity in the venture. While investment crowdfunding as a vehicle for financing early stage ventures is gaining momentum on a global basis it remains in its infancy. Our research on crowdfunding has been augmented by information gleaned from interviews of twenty different crowd investors from three different platforms including; Seedmatch, FundedByMe and Seedrs. The highlights below are the direct result of our study of crowdfunding investment decision-making at the Copenhagen Business School. The article summarizes the study into six rules that entrepreneurs should be attentive to in order to raise captial through equity crowdfunding.
Engage
Engaging the investor community is a key ingredient to running a successful crowdfunding campaign. Engagement consists of three phases: before, during and after the campaign. Successful entrepreneurs are present and approachable on different social media channels and they respond to questions promptly. Good communication only works if the company embraces transparency. The crowd expects to get all new information about the company immediately.
Research indicates that crowdinvestors are highly sensitive towards entrepreneurs’ interaction with the community, e.g. the quality of an answer to a question posted in the forum. Strategies for continuous involvement with investors during and post-investment are essential. A recent study highlights that “playing a role in the entrepreneurial process” is a central motive of many crowdinvestors. Managing expectations, asking for feedback and leveraging the capabilities of the crowd can create value for the business. Regardless of tone it’s important to listen and react to all of this feedback: entrepreneurs should consider suggestions, discuss them as a team, and respond to investors sincerely. Inviting investors into the entrepreneurial process is part of the fun and enjoyment of crowdinvesting. But through all of it entrepreneurs must stay true to their vision.
Neglecting the importance of investor relations ultimately deteriorates the chances of achieving the funding target and increases the risk of facing frustrated investors post-investment.
Proof-of-concept
Crowdinvesting is an attractive source of finance for very early-stage companies. Nonetheless, entrepreneurs thinking about running a campaign need to evaluate whether their business has enough traction to entice the crowd. Businesses solely based on an idea are doomed to fail. Every registered customer, signed partner, award, won competition or dollar earned is an indication of whether the business model works and increases credibility among potential funders. The majority of previous crowdinvesting projects have such a “proof of concept”, and can proof the viability of their product and service offerings through first live tests and measurements. prove.
Numbers Game
Other than in reward-based crowdfunding numbers play a vital role in the context of crowdinvesting. Financial forecasting is an important exercise for the entrepreneur to have a rough idea of how the business may develop. However, it is important to be realistic and humble in forecasting the businesses development. Sure, a great “hockey stick” analysis looks appealing to both the entrepreneur and potential investors, but our insights reveal that most investors are sceptical about the numbers presented by entrepreneurs. Particularly valuations of the business are often considered to be inflated, not reflecting the “real” value. Valuing the business requires a good balance between being humble and greedy by the entrepreneur. While crowdinvestors are less rigorous about valuations than traditional providers of risk capital, they still pay close attention to these factors and use them to get a better idea of the entrepreneur’s traits. One investor stated, “It does never make sense to invest in crowdinvesting on the basis of the valuation of the company. They do not have a clue how to do their valuation.”
Passion
The entrepreneur’s passion is certainly critical for many crowdinvestors as it is often a good indication of an entrepreneur’s drive and willingness to work hard and to do his utmost to make his venture succeed. Furthermore, entrepreneurs who are committed to and passionate about their venture can be persuasive and the majority investors regard them as being one investors stated, ”But it grabs me most if I get this feeling of passion and an idea where I can feel the entrepreneur wants to achieve something, they want to do a thing that is different and better.” Creating a company only works if one is passionate about it. Only then entrepreneurs will go through the demanding process of building a company and survive the downtime. Entrepreneurial passion is best conveyed through the video. A direct contact between the team and investors usually does not exist. Especially the video in which the entrepreneur presents the business idea deliver content to skip the emotional barrier and virtuality.
Unique-Selling Proposition
This factor may seem obvious, but many entrepreneurs fail to deliver the message of “this is why my idea will succeed”. Our research shows that the USP is the first factor investors consider when evaluating the merits of the product or service provided by the business. A perceived lack of a unique business model translates into the cancellation of the investment process. Entrepreneurs must present their USP in a concise, intelligible and engaging way. This is best done at the beginning of the video pitch.
Video
No matter if you raise funding for rewards, equity or debt financing, the production of visual content (your video) is not only important to “telling your story”, it is imperative to your overall campaign success. The powerful nature of these elements to your campaign cannot be overstressed.
For most investors the video is the first entry point to evaluating the merits of the investment opportunity. In most cases the video summarizes the main points of the business plan. Optimally the entrepreneur (and his team) present the information in an engaging and powerful way. This allows the investor to get a basic introduction to the business, but more importantly helps him/her to make sense of the people behind the project. A few investors made that point clear. One investors stated, “When you look at the video […] I think it is also about emotion, it is not only about the money. Its emotions that you believe in the team and decide “This guy will make it!” and another investors highlighted, ”[…] the one thing I will do is always to watch the video if I like the look of the person, the entrepreneur. You know it does not really give you much details about the entrepreneur, but it can generally generate an appeal for somebody who are watching them and the way they present.” In many ways the video can be seen as a virtual pitch to potential investors, similar to an investor pitch an entrepreneur would go through when seeking money from BAs or VCs. Therefore, entrepreneurs need to be aware of their target audience and how they convey their business idea comprehensibly and in an engaging, passionate manner.
The overarching importance of the video is a result of the online-based nature of crowdinvesting and the lack of face-to-face contact between the entrepreneur and investors. Instead of reading long business plans many investors solely base their investment decision on the content and quality of the video.
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Casper Arboll is based in Denmark and is a Project Manager at crowdfunding platform FundedByMe. He is co-founder and crowdfunding expert at HeartReacher, Casper consults entrepreneurs on how to run a successful crowdinvesting campaign
Balthasar Scheder is a Crowdfunding researcher at Copenhagen Business School.