Read Full Story Here – By Rafe Furst
- Hacking the Startup Fundraising Matrix
- How to Leverage Social Currency
- The Eightfold Path to Investment
- The Five Hindrances to Getting Funded
“The Matrix is the world that has been pulled over your eyes to blind you from the truth.” – Morpheus
The Big Idea
Contrary to what you may believe, there is a proven formula for raising capital. It’s what the world’s best CEOs and expert fundraisers have been using for decades. And now with fundraising and investing moving online, this formula can be amplified, and exponentially more valuable to you.
As we’ve shared this formula with founders raising on Crowdfunder, the data shows that those who follow this formula raise ten times the amount of investment as those who don’t. Founders who follow the formula on Crowdfunder attract $240,000 (founders who don’t raise only $24K). Founders who follow the formula close money 50% of the time from interested investors, whereas founders who don’t close less than 10% of the time.
I will show you how to hack this matrix, but first you need to understand what the agents are doing…
The Quantification of Startup Finance
“Never send a human to do a machine’s job.” – Agent Smith
Last year in 2014, over 70,000 startups got $24 Billion in seed funding from 300,000 investors. The number of funded startups has doubled since 2002; and the data shows that even when total investment dollars drops — as it did during the 2008 financial meltdown — the number of startups getting funded (as well as the number of investors) has steadily increased each year.
But this is just the tip of the iceberg for what’s coming.
The Small Business Administration notes that 6.5 million new businesses are started each year in the U.S., and there are an estimated 6 million U.S. investors who are qualified to invest in startups today. Once the final piece of JOBS Act legislation gets implemented, the remaining 200 million adult citizens of the U.S. will be able to invest in startups for the first time in over 80 years. According to the research the angel investment market historically returns 27% annually.
By contrast, there is roughly $20 Trillion invested in fewer than 20,000 public companies. Quantitative modeling and flash trading has already taken over Wall Street, making it difficult to impossible for a professional investor to make more than the historical average of 9% in the public stock market. One successful hedge fund manager recently admitted to me that he was thinking about closing his fund because he can’t justify taking his normal fees given how efficient the market is these days.
Back in 2013 I gave a TEDx talk where I predicted a shift in quantitative investing from the public markets to early-stage VC:
Two years later, the quantification of venture capital has started, see here, here, here, here and here. At Crowdfunder, we have over 10,000 investors, 27,000 companies growing at 10% month-over-month. In a few short years we’ve seen the VC community go from ignoring us, to scoffing, to mildly interested, and now they are not only sharing their deals and sourcing new deals on our platform, but also finding investors for their funds on Crowdfunder.
As more data and transparency comes into the startup investing process, more angels and VCs are realizing the virtues of a mathematical approach. And the math says that the correct approach with startups is to massively diversify. Dave McClure of 500 Startups has gone as far as to suggest that VCs who ignore the math are “gambling with [their investors’] money”.
These trends are all great news for you as a founder raising capital — if you understand how to unlock it and not get lost in the noise….
Taking the Red Pill
“Every deal is unfundable… until it’s oversubscribed” – AngelList CEO
Everybody wants to invest in the Next Big Thing, but nobody wants to be the first to invest. Two reasons for this. First is that, if I lead and nobody follows, you will be undercapitalized; which means I’ve just made a bad investment. The second reason is that we investors are social creatures, and we need the validation of other investors in your deal before we will commit.
Thus, there is no such thing as an “objectively fundable” company. And because of this, the funding matrix is hackable. One of the main keys to hacking it is social currency.
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.