Synopsis: Equity crowdfunding offers either succeed or fail – and you want to be one of the ones that succeeds! This article from bestselling author Nathan Rose explains how crucial it is to generate momentum early in your campaign. Read it NOW to give your startup’s chances of crowdfunding success a massive boost!
Momentum Is Crucial For Equity Crowdfunding Success
If you want crowdfunding success, momentum is critical. Momentum is everything. If you don’t have momentum (or can’t get it), then you will not have crowdfunding success. Period.
Why? The fact is, investors follow each other. This is observed in practically every type of investment, not just in equity crowdfunding.
The phenomenon of investors following other investors manifests itself perhaps most starkly in the field of economic “bubbles.” A “bubble” is what happens when so many investors follow each other that the price of an asset is forced unreasonably high. People start investing on the expectation that the price will keep going up and up and up, as was the case in the “dot-com bubble” of the late 1990’s and early 2000’s.
Bubbles have occurred so frequently throughout human history, that we can safely say they are a manifestation of fundamental human nature. The excellent book This Time Is Different by Reinhart and Rogoff exposes economic bubbles of all kinds throughout the last 800 years.
Investors following each other also manifests in the angel and venture capital space; one of the things that makes the biggest difference to your chances of securing funding is the presence of other investors. If someone else has already invested into your company, others will be more willing to.
We may like to think of ourselves as individuals, unaffected by the opinions of others, especially when it comes to something so important as where to put our money, but herd behavior is a deep and enduring part of our human nature. History is littered by stock market speculation, all fueled by investors following each other.
“Investors do not fear losing money as much as they fear solitude.” – Michael Lewis
The lesson for crowdfunding success should be clear: Get momentum. Get momentum. Get momentum.
In case you are still not convinced of the critical need for momentum, I am going to explain the reasons why investors follow each other in the hope that the point sinks in, so it will be at the forefront of your mind during your campaign.
Why Do Investors Rely On Others?
Imagine that investors had to make all of their investment decisions on their own, with no way to know what others were thinking.
Under these conditions, the only way to possibly tell whether an investment is worthwhile or not would be to read a detailed business plan, and then decide for themselves whether they trust what is inside.
Yes, investors *should* do this, but the reality is, most do not. Many investors are not financially trained, and thus lack the skills to read business plans properly – they don’t understand a balance sheet, they don’t know how to evaluate markets, strategies, and risks.
And even if they do have the skills, they might not have the motivation – reading business plans is time-consuming, and, frankly, not very enjoyable for most people. Doing all of this is also overly burdensome if an investor is only weighing up putting in a small amount, like $50 or so (as is the case with crowdfunding).
Then there’s the not-small matter of valuation – trying to determine a fair value for a company whose prospects are based on the unknowable future. Even the experts freely admit that valuation is very, very difficult and subjective, even for them. Equity analysts at big Wall Street firms have university training, years of experience, and go through rigorous professional accreditations, and are still frequently wrong about their prognostications about company value.
To make matters worse, evaluating investments is not something that crowdfunding investors are asked to do just once. They are faced with dozens to evaluate, and they need to choose between them and do so in a timely fashion. And let us not forget, people are busy. They have full-time jobs to hold down, and lives to live. The vast majority of people making crowdfunding investments are doing so in their spare time.
Faced with this kind of challenge, investors do a very natural, very human thing – they look for a shortcut. They look to the opinions of others, effectively outsourcing the mental work that they don’t want to do themselves. Startups seeking crowdfunding success need to take advantage of this fact.
Is This A Good Thing Or A Bad Thing?
Crowds may have wisdom. The entire crowdfunding industry is predicated on this notion – that we can take investment choices out of the hands of the professional investor classes, and instead turn this authority over to the masses to invest directly in projects they consider worthy.
The Wisdom of Crowds by James Surowiecki is frequently cited in support of the “wise crowd” point of view. However, one of Surowiecki’s central requirements for a wise crowd is independence. Independence means people form opinions in isolation, without influence from those around them. The fact anyone can easily see, via the progress bar, whether a crowdfunding campaign is already well-backed or poorly backed means investors are not making decisions in isolation.
But just because decisions aren’t being made in isolation doesn’t necessarily mean decisions are being made irrationally. Whether crowds are wise or foolish depends on whether the crowd is following smart initial investors.
If the initial investors…
- Are skilled
- Have decided to invest for rational reasons
- And have done so on an arms-length basis
…then the crowd will be following a rational decision. In this case, the fact a project has had sophisticated investors has real information content, which investors can indeed put some reliance on and reasonably follow.
Why Is This Important For Equity Crowdfunding Success?
A lack of momentum is one of the most frequent equity crowdfunding mistakes, judging by the failure rates across the industry. If your offer starts with nothing, chances are high that it will stay right there – at zero. If it’s still at zero (or close to it) after a week, your offer is effectively already dead in the water, regardless of whether it nominally has another few weeks still to run. There’s no chance of equity crowdfunding success when progress is stuck in the mud.
If a new investor sees that others have already backed a company with their hard-earned money, then they will assume there must be a good reason for that. “Thank goodness others have decided which of these options are worthy of investing in, so that I don’t need to,” is the relieved cry of the subconscious mind.
In crowdfunding, this dynamic manifest itself through a seemingly minor part of a campaign page: the progress bar. This little tool shows how much a company intends to raise, and how much they’ve already got committed towards achieving their crowdfunding success. Would-be investors get complete transparency over how the crowd is moving. This sort of information is irresistible for human minds, hungry for shortcuts.
People browsing the crowdfunding platforms use the progress bar as a “first screen.” The first thing they do is look for the companies that look like they have a good chance of funding, and THEN look at the business plan and financial model.
No investor wants to waste their time researching and thinking through something that doesn’t look like it will fund.
What Does This Mean For Startups?
There always needs to be a first investor of an equity crowdfunding promotion – someone who will take the leap of faith in an entrepreneur’s idea, even when no one else has yet. That special person who will stand up and say, “Yes. I will support you, because I believe in what you’re doing.”
Once that first investor has committed, it becomes easier and easier to secure new ones. Momentum kicks in. But if no one else has backed you, why should they be the first?
To use human psychology to your advantage towards equity crowdfunding success, you need to build momentum. The 80/20 rule applies. Spend 80% of your energy getting those initial 20% of investors on board. Launch with as much of the offer already done as possible. Make it look like reaching your target is a fait accompli.
If there is a celebrity or a heavy-hitter in the investment world among these initial investors, then so much the better. People will naturally follow a known leader even more willingly. Make sure everybody knows who has already backed you (with their permission). This “social proof” is far more powerful than you imagine.
To convince those crucial first investors is the hard part. But once you have done that and can show that critical momentum, your offer will be working with the tide of human nature, and equity crowdfunding success will soon be yours.