At a recent Angel Investor event I overheard an entrepreneur seeking capital ask an Angel Investor the following question.
“What sectors do you specialise in when selecting investments?”
The Angel Investor said he had no special preference as he was primarily after “anything that had enough in it to back up a 10 times return”.
That got me thinking.
Maybe a “Hope Matrix” like the one below would be a quick way for an entrepreneur or founder to work out where there particular opportunity is best pitched.
If they definitely have something that fits squarely in the top right then why bother with equity crowdfunding. Just go straight for the money!
- Top right: Near 10 times return and all the paperwork to back up a rational decision
- Top left: We believe you’ll get up to 10 times your money back but we have not got all the proof you need
- Bottom right: There will be a good return, maybe 5 times your money back and here is the proof
- Bottom left: We believe you’ll do well investing but we have no proof at this stage other than our self-belief
In my experience, after over 300 equity crowdfunding raises, most issuers seeking capital believe that they are firmly in the top right square and sincerely believe that just putting the raise on the platform will have well-heeled investors flocking.
If you look closely at the matrix though there are two things that are needed to achieve this:
- The perception that their opportunity will deliver a 10 times return (the easy part)
- The figures, evidence, support, credibility etc to back up this belief. (the hard part)
It is in the second “hard” part that they usually fall short. Thus despite persistent pitches to those in the top right no investment results.
It would save the issuer and prospective investors a lot of time if they realised where they were in the matrix, improved their position where they could, then pitched accordingly.
This is where equity crowdfunding and unaccredited investors come in.
Where there is hope and no evidence … passionate supportive followers are needed for a successful equity crowdfunding raise. These backers wont be from the top right unless they have a strong emotional connection with the people, technology or geography of the raise.
In the U.S., Title II platforms (Accredited Investors), pretty much operate in the top right and their is fierce competition for the good deals. It is also an easier road to travel to find investors. In countries where unaccredited investor platforms are operating the raises that reach the platforms are sometimes in the top right but more often in one of the other quadrants.
In anywhere but top right the founders, the capital raising team and the platform need to roll up their sleeves and direct as many followers as they can to the profile page on the web site. In our experience around 600 on average per raise.
Plus during the raises journey any information or updates that can move the perception of the raise along the line from emotional to rational will increase the odds of getting investment.
To me, this is true equity crowdfunding. Top right / Title II platforms follow a mechanisation of investment processes built on analysis and terms sheets. Other quadrants are built on hope, trust, connection, belief and continual communication.
After the money from an equity crowdfunding raise is invested in the business it is often likely that they can then move to the top right quadrant and get the expansion capital they need. Until then it is best that the founders work out where they are in the matrix, pitch accordingly, choose the right platform and flourish.