More Contact Equals Higher Investment Amounts
Understanding the decision-making process of an investor is a top priority for capital-seeking entrepreneurs. In fact, if entrepreneurs could choose one superpower it would probably be to read the minds of every investor. Superpowers aside, the real world presents an everyday challenge of figuring out why investors make the decisions they make. Why do they go with one company over the other? Knowing this answer in a competitive capital raising environment would be a monumental advantage for any entrepreneur vying for capital.
To investigate I searched and found a compelling research paper on the subject: “The Due Diligence of Crowdinvestors.” Thorough Evaluation or Gut Feeling Only? (2014). Throughout this informative and insightful paper, Dr. Christina Guenther, Dr. Christoph Hienerth and Research Assistant and Doctoral Candidate Frederik Riar discuss why investors make investment decisions and choose investment amounts. All three authors are on staff at the WHU-Otto Beisheim School of Management and offer their own expertise on the subject matter.
After executing a variety of studies on a German equity crowdfunding platform, their research showed that “crowdinvestors interpret and evaluate information using their expertise, experience, and invest their time to gather, compile, and analyze business ideas.” (12). This is nothing new and a general idea shared by anyone who understands investing. Investors are more likely to invest in products/companies they are already familiar with, but what the paper is really about is determining the relationship between these research factors and the amount the investor ultimately decides to pledge.
Their first proposal noted the positive association of the investment amount and degree of expertise. This proposal could only be partially validated. The next hypothesis dealt with the “relationship between the investment amount and prior investment experience, offline and online. Both (offline and online) hypotheses were supported (i.e. offline only weak).” (12). Their third and final hypothesis correlated the investment amount being positively associated with the degree of entrepreneur and investor communication. Emails, phone calls and online chats with the entrepreneur or founding team all add up to higher investment amounts. Entrepreneurs, are you paying attention now?
The paper does suggest that some investors may be only need a video pitch and business plan to make investment amount decisions, but the truth is 1-1 communication is more powerful than anything. Investors trust all of your offering information is real and true, but you are still a faceless organization to them. If a non-accredited investor wants to invest hundreds or thousands of dollars into your company, they are going to want some attention, feedback and to know your company’s personality. For American equity crowdfunding, you have to remember that a high percentage of these non-accredited investors have never invested before in their life. You may need to hold their hand a little in the beginning, but for capital and company image, you should be willing to do a lot more.
Here is another quality excerpt from the paper on this topic: “Our study shows that platform operators play an important role not only for providing information, but also for building mutual trust between entrepreneurs and investors. Thus, platform operators are well advised to facilitate direct communication and trust between entrepreneurs and investors (even if typical information is already provided electronically). Apart from the platform operators, entrepreneurs have to be open to the investigation of potential investors and thoroughly answer their questions.” (13).
The most important word in that excerpt is clear – facilitate. Make it easy. Make it easier. If an entrepreneur thinks all they have to do is write a clever sales pitch and upload all their documents to receive high investment amounts, they need to think again. Or read this blog. The truth is issuers need to make it easy to contact them and say in their offering they are open to chats, emails and phone calls. They need to make themselves more available, not lock the door to their office. The more positive communication, i.e. fast, friendly and informative replies, the more money the investor is bound to give you. Make yourself welcoming.
For example, if you have a very detailed and lengthy business plan, some investors may not want to take the time to search for an answer. With the availability of online chat and emails, if an investor sees an entrepreneur is online, they can ask them a quick question and get their answer. Open and close just like that. At truCrowd we will be offering all three of the aforementioned communication tools as well as a newsfeed for each entrepreneur and investor profile. This newsfeed will be updated like any other social media homepage and will show all of the offerings and investors a user is following.
The public newsfeed will be a highly rewarding opportunity for entrepreneur and investor communication. One of the major benefits of equity crowdfunding for entrepreneurs is being able to solicit the crowd. If an entrepreneur is torn on a decision, ask the crowd. If they want to know what people think of their prospective new product color, ask the crowd. This interaction will not only build relationships with the investors who participate, it will show the entire funding portal that the entrepreneur cares about what investors think.
The research paper by Dr. Guenther, Dr. Christoph Hienerth and RA Riar conveys a universal message, but they remind us all of the limitations of their study: they analyzed only one platform in Germany, they used only one instrument to collect data and they only did an exploratory analysis with single-items. With that said, their findings certainly speak to a worldwide audience and can be utilized in any capital raising situation. Entrepreneur to investor communication is a tool that could turn a once dormant and failing campaign into a buzzing and successful venture. All it requires is a willingness to offer effective communication.
Thank you again to Dr. Guenther, Dr. Christoph Hienerth and RA Riar and I will end this article with a quote by the great American Journalist Sydney J Harris:
“The two words ‘information’ and ‘communication’ are often used interchangeably, but they signify quite different things. Information is giving out; communication is getting through.”