In crowdfunding, momentum is king

In crowdfunding, momentum is king

1st July 2013 by Jeff Lynn

The investors who use Seedrs fall into two broad categories. Many are independent investors, people who have come to Seedrs to browse, discover and invest in great businesses. Others are network investors who have signed up to  Seedrs in order to invest in a specific campaign.

For a startup seeking capital through Seedrs, the independent investors often seem like the more exciting of the two. These are people whom the entrepreneur has never met before but who are so inspired by what they see that they decide to join the startup on its journey by putting their capital into it.

Network investors, by contrast, involve a lot of hard work to mobilise: the entrepreneur has to reach out to them through online and offline media, tweeting, Facebook-ing, attending networking events and putting in long hours in lots of other ways to drive them to invest in their business.

But if there is one secret to success on Seedrs (or on any equity crowdfunding platform), it is this: independent investors will only invest meaningfully if they see that the deal has momentum; and the only way to create momentum is to get network investors to invest the first chunk of capital.

This message is very much in line with what project creators who use Kickstarter have understood for a while. We have long been hesitant about the comparison between Kickstarter and Seedrs, because while we admire the rewards-based crowdfunding space very much, we think it is vastly different from investing in startups. But on the issue of momentum, there is a strong similarity, and the successful Kickstarter projects are the ones where the creator uses a combination of friends, family, extended networks and media to generate interest in the project.

So why do independent investors wait to see momentum from network investors before investing? We think there are two reasons.

Momentum proves that you know how to market your business

Investors want to see that the entrepreneur is willing and able to do the hard work to bring in network investors. Starting and growing a business is gruelling stuff, and it involves huge levels of persistence and energy in everything from generating sales to hiring talent; if you don’t show that kind of persistence and energy in raising capital, independent investors feel, what are the chances that you will do so in other areas of the business?

Momentum validates the demand for your product

The other reason is that that’s how human behaviour works. People like to be part of something that’s “hot”, that’s generating lots of excitement and moving quickly. Part of this is a rational reliance on the wisdom of the crowds: if lots of other people are so convinced this startup is worth backing, that can be a relevant data point in making an investment decision. And there is also a more emotional component, as people like to feel that they have gotten into a deal that is special and exclusive.

To summarise, if you are considering raising funds through equity crowdfunding then you should consider mobilising your current network of friends, family or any other potential investor before you go live.

Jeff Lynn

Jeff Lynn

I'm Executive Chairman and Co-Founder of Seedrs.

Digital Agency Kent