How to set up and run a small business

Billboard – Finance

You are here: Home » Finance » Raising Money » How to get investors to back your crowdfunding campaign

How to get investors to back your crowdfunding campaign

May 21, 2018

what do crowdfunding investors look for in businesses The goal of any equity crowdfunding campaign is to catch the attention of investors and convince them that your business is worth backing.

But how does the mind of an investor work?

With more equity crowdfunding campaigns run each year, it’s crucial to know what motivates potential investors and how they make their crowdfunding investment decisions.

For your crowdfunding campaign to succeed, you need to know the different types of investors and have an insight into how they think. If you understand what investors are looking for, you can make sure your equity crowdfunding campaign presses the right buttons with backers and boost your chances of hitting your crowdfunding target.

Understanding the two types of investors

There are, in essence, two core types of investors:

  1. Sophisticated investors and
  2. Retail investors.

Retail investors base their decisions on emotions, which may be because they already feel affinity to the brand or cause, or simply because they know the team running the campaign.

Sophisticated investors tend to invest more than retail investors, and are more methodological than emotional in their decisions – they are often private individuals or institutions, or at least hold the same traits.

Beyond these two core categories, there are some other common characteristics you can expect from investors:

  • Retail investors are primarily led by the heart, while sophisticated investors first consult their head. In other words, it’s an emotional, gut decision for the former and a more rational and analytical choice for the latter.
  • Retail investors are more open and ready to be swayed in order to invest. Sophisticated investors hold their cards closer to their chest and instead seek reasons not to invest.
  • Retail investors are motivated by belief in your idea, are in it for the long haul, and ready to bring their friends and family with them. Sophisticated investors are motivated by the prospect of financial return.
  • Retail investors are, by backing a project, putting a portion of their disposable income on the line. Sophisticated investors often invest in a crowdfunding project as a means to diversify their portfolio.

Sums invested by different types of investor

Surprisingly, the amount that investors put in, does not necessarily reflect their profile as a retail or sophisticated investor.

Some retail investors put in well above £100,000 without even asking for a business plan. Others show all the traits of a sophisticated investor, only to invest a couple of hundred pounds.

You may have heard some crowdfunding critics argue that retail investors have no business investing at all, which is something I take issue with.

All major crowdfunding platforms ensure that you are aware of the risks of investing before allowing you to put your money behind an idea. So, it’s up each individual how they choose to spend their cash.

Moreover, plenty of companies with experienced teams and institutional backing can fall flat. That is simply the nature of risk. Sophisticated and retail investors have different motivations, but investing for profit alone should hold no moral superiority over investing for passion.

In fact, major crowdfunding platforms and classic VC funds share similar success rates, so the crowd has clearly shown that it is more cunning than experienced investors might believe.

This shouldn’t come as a great surprise, either. The crowd represents the market, and if enough people are putting their money behind an idea, it is most certainly a good one.

Make your crowdfunding campaign stand out

The sure way to catch the eyes of the crowd is to target both retail and sophisticated investors.

Firstly, your company should be in good order as you enter your crowdfunding campaign. You’ll be able to prove that your model is financially-sound – that there’s an appetite in the market for your idea, and that you’re able to sell your products/services.

For maximum impact, run a marketing and PR campaign to coincide with your campaign, and let investors – and social media followers – know as and when the company receives coverage.

Any excitement you generate around your crowdfunding will help to mobilise both retail and sophisticated investors. Retail investors will be reminded why they love your idea, and sophisticated investors will view your business with increased credibility.

Don’t give investors a reason to doubt you

There are few things that put off investors, and they usually come down to being unprepared, or unavailable:

Always answer questions on the public forum

Many a crowdfunding campaign has fallen due to a tight-lipped founder. To give confidence to investors, you need to prove that you’re prepared, and trustworthy.

Include your financial model

Sophisticated investors will want to test your forecasts and ensure your business is profitable, even if you don’t reach your targets. Retail investors will also have more faith if you’ve come prepared.

Do your homework

Who are your competitors? What’s the size of your market? What are the future trends? These are among the key questions that investors will expect you to know.

You’ll find more help in How to prepare your business for crowdfunding. And if you are looking to raise money under the Enterprise Investment Scheme (EIS) then make sure you know how the recent EIS changes affect crowdfunding.

Make yourself available during the campaign

Personally explain your crowdfunding campaign in a video, host an investor event, webinar or hold an open office.

Beyond your idea, investors will be investing in your team and, ultimately, you. Take up any opportunity you can to engage with them.

Attracting passion, or attracting profit?

It’s incredible to see so many startups taking their innovative ideas to crowd. The world faces many challenges and it’s inspiring to see crowd-powered projects that seek to solve then.

For example, crowdfunding is being used to protect Australia’s Great Barrier Reef, to tackle homelessness in the UK, and even recycle plastic into oil.

The main backers of these passion projects, or passion investments, are retail investors, and their impact can be truly world-changing.

However, it’s better for any company to try and attract both retail and sophisticated investors. If you’re able to speak to both the head and heart of would-be-backers, then your chances of success increase immensely. And, it’s a huge advantage to have on board both experienced investors and people who feel truly passionate about your cause.

All companies can take steps to appeal to both kinds of investor, so combining well-researched financial and market forecasts and world-changing ideas is the best way to create a project that backers can passionately back, and expect a decent return.

So, will your business attract passionate retail investors, profit-driven sophisticated investors, or a combination of both?

About the author

This guide has been written exclusively for ByteStart by John Auckland, 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. 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.

More on funding a business

ByteStart is packed with help and tips on all aspects of starting and funding your business. Check out some of our most popular guides;

Funding your business

Cashflow

Starting Up

Image: DepositPhotos.com