September 26th, 2018
Hacking the Startup Fundraising Matrix
Medium | By Rafe Furst | Dec 8, 2015
The Matrix Runs on Social Currency
“Do you believe that’s air you are breathing now?” — Morpheus
Social currency is the trust, goodwill and credibility you have within your network, and more generally with your brand and reputation. Every person has it, and every company does too. While it may be invisible, social currency is what breathes life into startups, and transforms pure ideas into massive enterprises. Mastering social currency is what can take your deal from unfundable one day to oversubscribed the next.
Take for instance Neil Young. While he had a massive following as a musician, nobody would have believed he could launch one of the hottest technology startups of 2014. But he did, and he used his social currency to do so.
The first thing he did was get all of his influential musician friends to participate in a short video where he demonstrated his product concept: a high-definition audio player called Pono. The testimonials from these influencers was so powerful that it helped Pono raise $6 Million in pre-sales on Kickstarter. He then parlayed that success into a $4M equity investment round on Crowdfunder. The demand was so high for Pono’s equity that 8 out of 9 interested investors were turned away, leaving an estimated $6M in investment interest unsatisfied.
While you may be quick to dismiss Neil Young’s crowdfunding success because he was already famous, many founders just like you have already raised over a million dollars using equity crowdfunding.
The key to their success is always the same: leveraging their social currency and transforming it into investment capital.
Transform Your Currency
“I know Kung Fu!” — Neo
Your campaign will consist of five phases:
- Building Social Currency
- Closing Your Lead
- Closing Your Network
- Public Closing
- Victory Lap
While you don’t have to run the public portion, I personally believe this is like playing tennis with a wooden racket today. Here’s why. Until the recent JOBS Act, it was illegal to run a public investment campaign for a startup. And because of this, the entire industry became accustomed to working within the restrictions, and frankly, we became gunshy. Which means there’s a near-term opportunity for early adopters to take advantage of the advantage, before everyone else catches on. So I’m going to assume you will run a public portion, but if not, you can just skip Phase 4.
Also, I’m going to assume you will use the Crowdfunder platform (or another online platform). Sure you could run your campaign entirely offline like in the old days. But consider what that signals to your investors, especially if you are a tech company. Also, the power of the internet combined with the JOBS Act changes makes online fundraising the perfect complement your offline efforts.
With those caveats out of the way, here we go down the rabbit hole….
Phase 1: Building Social Currency
In order to close investors, you will first build your social currency using your company’s Crowdfunder profile.
Each of your stakeholders should have a full social profiles. This includes your team members, advisors, existing investors, key customers and partners, as well as your family, friends and fans. Anyone who would be willing to help you get the word out about your campaign, either because they have a financial stake in your company, or because you asked as a favor. They can populate their profile by simply logging in at Crowdfunder with their LinkedIn or Facebook accounts.
Next make sure everyone Follows your company. This is important because you will engage them later with the Crowdfunder messaging system to activate your campaign.
The final step once your stakeholders are onboard is to use your social currency to activate three key groups: potential lead investors, your broader social network and the general public. You will work on these tasks simultaneously and thoroughly before moving on to Phase 2.
Sourcing Your Lead Investor
You find a lead investor by targeting your hit list of ideal leads, methodically going about meeting each of them, and forming good relationship with each. They might already be on Crowdfunder, but even if not, you can use the six degrees of separation principle with your friends and colleagues to get to each investor on your hit list. If you’re not sure who would make a good lead investor, ask your stakeholders who they recommend. Then use LinkedIn to figure out who can make introductions.
Target ten potential lead investors and don’t stop until you meet all of them (or find suitable substitutes). Scott Sherman says that you can get to anyone in the world if you can get three of their first-degree contacts to mention your name to them within a relatively short period. Use Scott’s “Rule of Three” to engineer an introduction to the people you want to meet.
Ideally, you want ten conversations going about your company with potential lead investors. Your goal here is simply to form a good relationship without the pressure of pitching them to invest now. Tell them that you are not currently fundraising but want to be prepared. In return for their valuable time/advice, you will give them first look before you open your round.
Share your plans for the company, and specifically what you are doing between now and when you do open your round. Make sure whatever you tell them, you work hard to do it. Then report back to them on your progress, even if you fail to meet your goals. Investors look for founders who show this type of transparency and follow through.
Even if none of your hit list ends up becoming your lead investor, you will have ten powerful allies. They may end up investing in a later round, or introducing you to colleagues who are a better fit for you as an investor now.
Activating Your Network
This is where you max out your LinkedIn, Facebook and rolodex. Let your friends and colleagues know you will be opening an investment round soon with a professional lead investor. Let them know that if they want to get in before the rush, they should Follow you on Crowdfunder. Also ask them for introductions to their friends and colleagues who would appreciate the introduction to you.
Don’t forget about your best business relationships, especially your best customers and strategic partners.
Whenever possible, meet with prospective investors in person or video chat. Just as with the lead investor, build a relationship. Let them know you will come back to them once you have chosen a lead (who will set the investment terms).
Keep detailed notes on each meeting and each person, especially the reasons why they invest, what size investments they typically make, and what value they bring to the the companies they invest in (beyond just their capital). You are not only presenting yourself to them, but also assessing their fit as an investor for you.
Make sure everyone you speak to Follows your company. If you need to couch it as a favor, do so. This is proper use of your social currency, which will pay dividends later on as your campaign unfolds.
Preparing to Go Public
Back in 2012, Mike Del Ponte revealed to Tim Ferris how he hacked the Kickstarter matrix in gory, glorious detail. Then in early 2015 Peter Diamandis and Steven Kotler devoted a whole chapter to crowdfunding success in their bestseller, BOLD. While both of these pieces are about donation or pre-sales crowdfunding, at least 90% of the learnings and techniques can be applied verbatim to your public equity crowdfunding campaign.
The operative concept is that you are “engineering overnight success” at least a month ahead of your public launch. It’s a numbers game. For instance, lets say you are raising $500,000. If you can reach a collective audience of 100,000, then get 1% of them to click through, then get 10% of those to make to make investment reservations, and then close 10% of those people to invest $50K each, then you’ve reached your goal.
One advantage you have over most Kickstarter campaigns is that you likely already have a customer base, user base, or some sort of product/service offering that you can use to get the word out. That’s in addition to the buzz generation techniques that Mike outlines above. One of the biggest mistakes I see founders make is being reluctant to message their users/customers about their investment round. But what better candidate to invest in your company than someone who already knows and loves what you do?
The other advantage of equity crowdfunding is that you can incentivize interested investors with your product/service in the form of Investor Perks. Investor Perks work similarly to Kickstarter Rewards in that the more money someone invests, the more value you give them in the form of Perks. For example, Sierra Lifestyle gives its investors credit vouchers for the full amount of their investment. Thus, the more they invest, the more credit they get towards product purchase.
As a prospective investor, this is a fantastic value for me. In my mind, I know the investment is risky and I could lose everything. However, if I receive fair market value in product for my investment too, then I feel like a return on the equity is somewhat of a bonus. In my mind, the Perk has “de-risked” my investment.
While Investor Perks are not always appropriate, they can turn a difficult close into an easy one. If you do add Investor Perks make sure they are value-aligned with your company’s mission and products. And don’t be afraid to be creative. Sometimes the best Perks are unique experiences with little hard cost to you but huge perceived value to your investors.
Phase 2: Closing Your Lead
Part of what you have told your prospective lead investors in Phase 1 are the milestones you will achieve before you are ready to open your round. You will also have gotten feedback from them to make sure you are setting the right milestones. Once you achieve the milestones, go back to each of your prospects and close them.
If you have achieved your milestones and there are still objections, then those people are probably not going to invest. Let them know you are interviewing other lead investors and will come back to them if there is still room in the round.
The terms under which you close your lead investor is a matter of negotiation. There is no right answer, but both you and the investor will each have a range of acceptable terms, for example a range of acceptable valuations for the company. Assuming there is overlap in your respective ranges, then there is a zone of possible agreement. Where in that range you end up is what’s being negotiated.
The way you get the best deal possible for yourself (and existing shareholders) is by having the option to walk away from the deal. And you only have that option if you either don’t need investment, or you have multiple investors you are negotiating with simultaneously. This is where your work in the previous phase begins to pay off.
The National Crowdfunding Association of Canada (NCFA Canada) is a cross-Canada non-profit actively engaged with both social and investment crowdfunding stakeholders across the country. NCFA Canada provides education, research, leadership, support and networking opportunities to over 1300+ members and works closely with industry, government, academia, community and eco-system partners and affiliates to create a strong and vibrant crowdfunding industry in Canada. Learn more About Us or visit ncfacanada.org.