In this article I’ve highlighted some of the most critical factors that drive successful startup fundraises online.
For a brief refresher, it was just over a year ago (September 2013) that we saw Title II of the JOBS Act kick off and unleash a powerful new market for startup funding online, also referred to as equity crowdfunding.
This new capital market created under Title II is showing rapid growth, even while the opportunity to invest is currently limited to accredited investors and institutions.
Restrictions keeping everyday people (non-accredited investors) from participating may be lifted at some point under Title III of the JOBS Act, though regulators have stalled to release final rules.
That said, startupsand investors are not waiting on Title III. The new startup funding market is off to the races. Technology and automation are rapidly transforming the way investments in startupsand small businesses are done – driven primarily by a few leading equity crowdfunding platforms.
Today we are seeing everyday individual investors getting to invest alongside VCs and super-angels online, often in the same deals and at the same terms as some of the worlds most experienced early stage investors.
According to Kay Koplovitz and her article on the impact of the first year of equity crowdfunding, estimates for the startup funding commitments made online were estimated at over $217,000,000 in equity and debt. The sectors leading the way were the technology and real estate sectors.
Within these funding numbers are a variety of potential signals for what leads companies to succeed with raising startup funding online. Here aresome of the potential signals and success factors that are drive startup funding online.
Integrate Offline + Online Fundraising Efforts
Smart entrepreneurs today are using the internet and technology to supercharge their fundraising efforts.
It’s only been a year since equity crowdfunding became legal and widely available to any entrepreneur – but now it’s clear that the fundraising landscape and behaviors are changing.
We’re moving towards a world where an investment ready company has the potential to reach several thousands investors in a day. This has, and will continue to, change the dynamics of direct fundraising efforts inside the board room.
I’ll go out on a limb to say that in another quarter or two, raising startup funding online will become the “new normal.”
Meaning that if you’re an entrepreneur with a startup and you are not taking advantage of the ability to pitch online, get distribution to hundreds or thousands of potential investors, leverage the powerful social proof and signaling that equity crowdfunding brings with it, and use automated investor closing tools that equity crowdfunding provides – then you’ll be missing out on a huge opportunity.
Smart entrepreneurs are also finding that their online fundraising efforts help accelerate and drive outcomes in their direct discussions with investors offline.
More than 75% of the startup founders that I’ve met or spoken with who have successfully used equity crowdfunding found that their online efforts helped not only connect them to new investors they met and spoke with offline, but also played a meaningful role to help close investment from offline investors they were already speaking with.
Online fundraising isn’t a replacement for strategic direct and offline fundraising efforts – it is the perfect complement.
Follow The Leader
Investors trust other investors more than they trust entrepreneurs. As such, who else is investing in a startup is one of the more powerful signals that can attract investors.
In my experience as the CEO of a startup funding platform, our company has observed that when a startup has a credible or notable lead investor in their current funding round it brings roughly 5 times the amount of engagement and follow on investment to a deal- as compared with startupsthat don’t have first money or lead investors in.
The power of of who else is investing and how this impacts the attention and decisions of other would-be investors operates in part on what is called “social proof.”
Social proof is one of the most powerful ways that our thinking amp; decisions are influenced, according to Dr. Robert Cialdini in his book “Influence: The Psychology of Persuasion.”
Of course, finding a notable or lead investor doesn’t happen overnight. It means you have to spend the time to build a real relationship with an active investor.
For one of the better explanations of exactly how and why to get to know and investor and build the kind of relationship that can lead to a lead investment, read the post by VC at Upfront Ventures, Mark Suster, called “Invest in lines, not dots.”
Do the meaningful work of finding some more experienced investors who will both help you arrive at market terms for your funding round, but also bring their name and experience with them. The validation and the social proof will do wonders for your fundraising.
Leverage The Power of Story
Startups and entrepreneurs who excel at fundraising aren’t just the ones that have the best traction or most experienced management team- they’re often great storytellers.
Each investor has what I call the Two Brains. For an investor to invest in your company, you ultimately need to engage, stimulate, and satisfy the Two Brains.
The first brain is the rational and quantitative brain. This is the part of each investor that wants and needs to boil their investment down to the dollars and cents of their potential return and risk. We all know this brain when it questions our sales projections and our financial assumptions.
Inexperienced fundraisers often spend most, or all, of their time appealing to and trying to convince the rational brain to invest.
The second brain is the non-rational, or emotional brain. This is the part of each investor that cares about the context and larger story of a business. The huge market potential you see for your business as an entrepreneur, and the unique approach and culture you’re going to use to serve customers and win this market is what activates the second brain of the investor.
All successful fundraising pitches, even online, start by painting a powerful and compelling story for the investor and then walking them through the rational parts of the business in the context of the larger story.
What’s great about startup fundraising online is that you now have incredible powerful and visual storytelling aides through which to pitch investors – leveraging visual pitch decks, videos, and social proof points like who else is investing – all in one place.
For a template built from other successful startup pitches that will guide you through crafting a powerful story for investors, see The Ultimate Pitch Deck To Raise Money for Startups.
Lower The Investment Minimum, Raise Funding Conversion
Something new and interesting happen when the minimum investment amount an investor has to meet to invest in a startup falls from where it used to be in the past – say $50,000 or $100,000 – and instead comes down to as little as $5,000.
When this happens, both the real and perceived risk and exposure for any single investor changes dramatically. Now, it’s not that investors don’t expect or want a return when they invest smaller sums. They do. It’s that for $5,000 the decision to invest changes.
But won’t a startup have a big problem on its hands with a crowd of small investors?
Equity crowdfunding solves this problem by aggregating these smaller ticket investors in to a single entity or mini “fund.” These mini-funds aggregate the smaller investors together in one entity, and that entity invests as a single entry on the respective companies Cap Table.
This simplification of the funding model provides an effective solution for startupsto lower their minimum investment amount, and enables them to go out and take funding form a larger potential pool of investors
When In Doubt, Execute
If there’s one thing above all else that investors value that helps drive successful fundraising outcomes online or offline, it’s when an entrepreneur has a clear focus, aggressively executes, and creates meaningful results as measured by specific month over month growth or product milestones.
Your fundraising success online and offline will be amplified by these things.
Disclaimer: I’ve been a participant in JOBS Act legislative and regulatory efforts in Washington DC and currently serve as the CEO of equity crowdfunding platform Crowdfunder