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
“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 hitlist 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 hitlist. 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 followthrough.
Even if none of your hitlist 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.
Phase 3: Closing Your Network
Once you have closed a lead investor, you can begin closing people from your network.
Your pitch is online at Crowdfunder, as are all Your supporting documents, such as financials and disclosures. And through your efforts in Phase 1, a good portion of your network is now Following your company. Send them a message announcing the lead investor. Then reach out to each person directly via email/text/phone to set up a closing call or meeting. Make sure to reach out to everyone you spoke to, even if they are not Following your company.
To close investors, set up group calls and meetings if possible. This creates the proper signaling to investors that your time is limited, and that there are many other investors looking at your deal. (It’s the same dynamic created by having an open house just once a week when you are selling your house). If grouping is not possible for certain investors, limit your call to 15 minutes.
Once they have agreed to speak, direct them to your online pitch and documents and urge them to review prior to your call/meeting. This does several important things: (1) gets them invested in your deal with their time/attention (2) sets the proper expectations that the call won’t be to pitch them, but rather to close them (3) filters out the tire-kickers from the buyers.
Before you speak to anyone, make sure that the major questions and objections (which will inevitably come up) are thoroughly and clearly addressed in your pitch and diligence documents. For less important questions, you should maintain an online FAQ and update it when new objections or question arise. Then, when you are speaking with investors, instead of answering questions that can be found in the FAQ, politely remind them that these details can be found on Crowdfunder. Tell them you want to be respectful of their time (and your own) by sticking to the most important, high level items that are make-or-break for their investment.
Reserve part of the time to interview the investor about what makes them a good investor for your company. Ask them what they plan to contribute besides capital — if y0u accept their investment. Give them your list of needs, for instance: introductions to strategic partners, advice in their area of expertise, feedback on new product features, etc. By having your investors qualify themselves, this will make it easier to close them as investors, and it will set your relationship up for success going forward.
Use Crowdfunder’s investor CRM system to efficiently track and reflect the momentum in your round.
The more interest and momentum you share with investors who are looking at your deal, the more excited and likely they will be into invest (remember, you’re “unfundable until oversubscribed….”)
Finally, you should end every closing conversation with investors by giving them a deadline for their decision and for getting their money wired. Let them know that the public campaign will begin after the deadline, and they will lose their spot if they miss the deadline.
Phase 4: Public Closing
The more of your online campaign goal you have already closed from your own network, the easier it will be to attract and close investors from the Crowdfunder network, and the public at large. Having lots of interest from the public is also good signaling for folks in your network who are on the fence.
There is no hard and fast rule, but I like to close 70% of my fundraising goal privately, before letting the public in. Note that you are always free to take in more than 100% of your stated goal, as long as your investment documents allow for that.
Once your deal is public you will have to take active steps to verify that investors coming in are accredited. Crowdfunder will help you with this if you ask, just email firstname.lastname@example.org.
Phase 5: Victory Lap
The final phase of your campaign is to let everyone know the good news of your success. Remember, your ultimate goal is to build a successful business and serve your customers; the investment capital you raised is simply a means to that end. With your successful raise, you have just built up new social currency, which you can utilize to grow sales and build your brand.
The first people to contact are those lucky folks who invested. Congratulate them and welcome them aboard. Most importantly let them know how they can help you build the business, and hence increase the value of their equity.
Next, you should contact everyone who you touched in the campaign process, even if they didn’t invest. This includes all the folks who expressed interest in your deal on Crowdfunder but didn’t invest for whatever reason.
Finally, you should let the world know through PR and social media. Here’s a press release that one of our companies issued, which got picked up by a number of sources. This extra publicity mostly likely helped them attract new customers too.
Matrix Training Program
“Everybody falls the first time.” – Cypher
I’ve just showed you how to hack the startup fundraising matrix by planning and executing a five phase campaign using your social currency. Now you have to jump in and start. You won’t be perfect, and that’s okay. Don’t let the perfect be the enemy of the good. Here are some tools and resources to help:
- Success Stories from Crowdfunder
- The Ultimate Pitch Deck to Raise Money for Startups
- The Guide to Equity Crowdfunding
- Term Sheet Resources
I also highly recommend listening to every episode of Gimlet Media’s Startup Podcast. Here are some episodes especially poignant for fundraising:
- How Not to Pitch a Billionaire
- Startups are a Risky Business
- Another Side of the Story
- How Listeners Become Owners