Equity crowdfunding: winning the minds and hearts of investors

Your investors: a big and diverse bunch… how to win their minds and hearts?

In order to run a successful equity crowdfunding campaign, you’ll need to convince quite a few investors. On the platform Crowdcube, the average was 333 investors per campaign in 2017.

These investors will range from your friends and family (who are likely to back you just because they love you) to extremely sophisticated investors and business angels that will dissect your business before taking a decision. After all, investing in unlisted companies is a very risky move, with 56% of investments failing to return the capital and only 9% returning 10x or more, as the report Siding with the Angels shows.

So, how do you appeal to this broad range of people? Well, my background is marketing and I will approach this problem from the optics of the ‘benefits’ of your ‘product’. In this case, your product is your business. And the benefits can be rational and emotional. Even the shrewdest of the investors will ignore your pitch if you are not able to tap into their emotions.

So let’s look at both rational and emotional reasons that you’ll need to cover to win the minds and hearts of investors.

They want good, objective reasons to invest

On the rational camp, we have some basics that need to be covered:

• Business model and plan: ideally it will have some traction through a Minimum Viable Product (MVP) with the basic functionalities. It will be in a market that is either big or has a great potential for growth. It will be a profitable business within a reasonable time frame (technology is allowed to go without a profit for a long time as long as the user base keeps growing, while consumer products need to be profitable almost from year 1).
• Team: the team is credible and as a track record. Some investors follow the rule ‘invest in the jockey, not the horse’, so this part is crucial. Is it a well-balanced team? Do the co-founders get on well? Are they credible and trustworthy?
• Competition: who are your competitors? What market share do they have? What are their strengths and weaknesses? How are you going to beat them?
• Timing: Why now? What has changed in the market to make your business possible? Think carefully about those questions, as they are key to many investors.
• Exit plan: the savvier investors will want to see a very clear exit plan. One of the main criticisms to the equity crowdfunding model is that the capital is extremely ‘illiquid’, so the cash is tied up almost indefinitely. Show that you are already thinking on how to exit and you’ll attract the more sophisticated investors.
• SEIS/EIS eligibility: this is a must for a lot of UK based investors, due to the great tax benefits they will enjoy. Make sure you get advice from specialists, as it’s an off-line process, difficult to track and you’ll want to get it right first time.

The more seasoned investors will also want to avoid ‘red flags’:

• Overvaluation: usually the most debated topic in any crowdfunding campaign. The investor needs to feel that they’re getting a good deal. We’ve seen quite a lot of companies re-evaluating the equity given during a crowdfunding campaign due to the strong feedback from the investors. Do your homework! (post on how to value your company coming soon, watch this space)
• Team: some red flags on this front are a ‘part-time’ team or one that doesn’t have ‘skin in the game’ (i.e. they could move on at the first serious challenge to the business).
• Scalability vs. ‘lifestyle’ businesses: sophisticated investors will stay away from non-scalable businesses as they’re very unlikely to provide a serious return.
• Complicated business structures: sophisticated investors like to be very clear in what they’re investing in. Related to this, if there is any Intellectual Property, does it belong to the company or to the individual?

But you’ll need to also win their hearts

Even if you tick all of the rational boxes, it’s very unlikely that you’ll get a lot of investment. Professional investors see hundreds of pitches every week, and you’ll need to grab their attention appealing to their emotions. How do you do this?

• Storytelling: the video pitch and your face-to-face presentations are your best tools for this. People want to invest in people. Personal stories, when relevant to the business, work very well. Was the business born of a personal challenge or frustration? What was your journey to overcome this?
• Unfair advantages: what makes your idea and team special? Is there a ground-breaking technology, incredible partnerships with big names, an extremely well-connected team? Search for an unfair advantage and communicate it.
• Sense of urgency and FOMO: the relative low duration of the crowdfunding campaigns will play in your favour here. Either they invest now or there might not be another opportunity – or if there is, it’s not going to be such a good deal!
• Talking from an authority point: instead of positioning your pitch from a weak standing (‘please give me money’) you should position it as a great opportunity not to be missed (linking with the FOMO point above).
• Avoid cliches: ‘ low-risk investment’, ‘no real competition’… quotes like that just will turn-off investors – even if you honestly think it’s the case, it might be interpreted as a lack of awareness. Beware of your language!
• The ‘hockey stick projection’: it’s a tricky one. On one hand, investors want to see that they will get a return. On the other, it’s become such a cliché that it has lost credibility. Be ready to justify this!
• Investing locally: investors might like to have access to the founders. From an even more emotional point of view, there is a clear trend in ‘buying local’, as the linked Statista chart shows. From 33% of people to over 55% in 2017! It’s up to you to capitalise on this!

This is how you weave it together

To appeal to a broad group of investors, you’ll need not only to make sure you’ve got the rational elements covered but also that you appeal to their emotions. It’s a tricky balancing act, but with a solid business plan, good storytelling and avoiding ‘red flags’ and clichés, you will win the minds and hearts of investors: from your most ardent fans to the most sophisticated business angel.

As always, if you have any questions, build-ups or feedback don’t hesitate to comment or contact me with the form below.