Crowdfund Insider | By Casper Arboll & Balthasar Scheder | July 29, 2014

Crowdfunding is a new source of entrepreneurial finance allowing a wider audience to invest in startups for equity in the venture.  While investment crowdfunding as a vehicle for financing early stage ventures is gaining momentum on a global basis it remains in its infancy.  Our research on crowdfunding has been augmented by information gleaned from interviews of twenty different crowd investors from three different platforms including; Seedmatch, FundedByMe and Seedrs.   The highlights below are the direct result of our study of crowdfunding investment decision-making at the Copenhagen Business School. The article summarizes the study into six rules that entrepreneurs should be attentive to in order to raise captial through equity crowdfunding.

Engage

Engaging the investor community is a key ingredient to running a successful crowdfunding campaign. Engagement consists of three phases: before, during and after the campaign. Successful entrepreneurs are present and approachable on different social media channels and they respond to questions promptly. Good communication only works if the company embraces transparency. The crowd expects to get all new information about the company immediately.

Research indicates that crowdinvestors are highly sensitive towards entrepreneurs’ interaction with the community, e.g. the quality of an answer to a question posted in the forum. Strategies for continuous involvement with investors during and post-investment are essential. A recent study highlights that “playing a role in the entrepreneurial process” is a central motive of many crowdinvestors. Managing expectations, asking for feedback and leveraging the capabilities of the crowd can create value for the business. Regardless of tone it’s important to listen and react to all of this feedback: entrepreneurs should consider suggestions, discuss them as a team, and respond to investors sincerely. Inviting investors into the entrepreneurial process is part of the fun and enjoyment of crowdinvesting. But through all of it entrepreneurs must stay true to their vision.

View:  10 step guide for successful equity crowdfunding (by SeedUps Canada)

Neglecting the importance of investor relations ultimately deteriorates the chances of achieving the funding target and increases the risk of facing frustrated investors post-investment.

Proof-of-concept

Crowdinvesting is an attractive source of finance for very early-stage companies. Nonetheless, entrepreneurs thinking about running a campaign need to evaluate whether their business has enough traction to entice the crowd. Businesses solely based on an idea are doomed to fail. Every registered customer, signed partner, award, won competition or dollar earned is an indication of whether the business model works and increases credibility among potential funders. The majority of previous crowdinvesting projects have such a “proof of concept”, and can proof the viability of their product and service offerings through first live tests and measurements. prove.

Video:

• Equity Crowdfunding for Real Estate in Canada (Google Hangout, Crowdinvesting)

• Canada's equity crowdfunding market takes tips from the UK

Numbers Game

Other than in reward-based crowdfunding numbers play a vital role in the context of crowdinvesting. Financial forecasting is an important exercise for the entrepreneur to have a rough idea of how the business may develop. However, it is important to be realistic and humble in forecasting the businesses development. Sure, a great “hockey stick” analysis looks appealing to both the entrepreneur and potential investors, but our insights reveal that most investors are sceptical about the numbers presented by entrepreneurs. Particularly valuations of the business are often considered to be inflated, not reflecting the “real” value. Valuing the business requires a good balance between being humble and greedy by the entrepreneur. While crowdinvestors are less rigorous about valuations than traditional providers of risk capital, they still pay close attention to these factors and use them to get a better idea of the entrepreneur’s traits. One investor stated, “It does never make sense to invest in crowdinvesting on the basis of the valuation of the company. They do not have a clue how to do their valuation.”

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