Why Successful Crowdfunding Requires a Social-Media Mind-Set

If you tell experienced investors you’re planning to your business idea, you’re likely to hear that you’re walking into a minefield: You’ll be relying on naïve individuals who expect to make a killing and are crushed every time they lose a dollar.

But a survey by British crowdfunding facilitator CrowdCube provides a more nuanced picture of these investors, one that shows why it’s particularly important for would-be recipients of crowdfunding to understand social media and the way social-technology users think.

First, crowdfunders seem to understand the high risk of putting money into a new idea, the survey shows. They’re well aware that most small businesses fail. As a result, they spread their investments. Moreover, many take due-diligence seriously, and they limit their investments to amounts they can afford to lose. In other words, they may be inexperienced, but they’re not stupid.

Second, what seems to be happening is that the “social media culture,” in which people feel close to and want to be part of brands they like, is extending into social investing. cofounder Luke Lang says two-thirds of investors surveyed expressed the need to feel some emotional connection with a target company. “It seems it’s not just a cold, calculated financial investment,” he says. He also notes that people said they enjoyed their investments and had a bit of fun with them.

Companies wanting to get involved in crowdfunding need to assimilate this idea into their strategies. They should engage customers and other potential funders through social media and present a human face.

An understanding of the certainly helped Scottish beer company BrewDog, which sold shares to the public under a scheme it called Equity Punks. The company set this up after traditional funding sources such as banks dried up. BrewDog, which is described by cofounder James Watt as an “anti-business business,” engaged with its customers directly. It encouraged people to spread the word on social media among their friends, virtual and otherwise. Very quickly it became clear that the excitement was as much about belonging somewhere as about money. Some 7,000 new investors have put up £3 million. The Rushmore Group, a chain of bars, used similar tactics to raise £1 million.

The survey does support some of the conventional wisdom: Most investors in crowdfunding aren’t high-net-worth individuals (only 6% of them fall into that category). That means they tend to make small investments. And at times, their enthusiasm may trump their rational judgment. A wise company will stress the risks to avoid a backlash on the same networks that it used to raise cash. It’s important to explain to would-be funders exactly what the purpose of the new money is and to provide a realistic description of how the whole thing could collapse. CrowdCube and other crowdfunding sites like Seedrs and Kickstarter make it very clear that startups are more likely to fail than established businesses. The vulnerability of inexperienced investors hasn’t been lost on regulators, by the way: Crowdfunding facilitators like these are regulated within an inch of their lives — as is the BrewDog investment.

But if your company is comfortable with the social-media mind-set, you can gain a lot by turning to the crowd for funding. For example, you might not have to give up as much control to the crowd as you would to an experienced . Before embarking on the Equity Punk scheme, the two founders of BrewDog owned 100% of the business; after two rounds of crowdfunding they retained just under 80%. Would a seasoned VC have handed over £3 million for only 20%?

Probably the biggest lesson is that companies can benefit in ways that go beyond increasing their capital. BrewDog’s James Watt says the social and marketing benefits of the company’s crowdfunding campaign have been impressive: “It ended up being all about building a culture and helping with marketing.” The company’s new small shareholders get discounts on the company’s products, and they can gather in a private forum to chat. This is more than a straightforward financial holding. Like social media itself, it’s all about community.
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