The evolution and use of the term ‘crowdfunding’ is rooted in donations and rewards based campaigns that began on Kickstarter, and its use has continued throughout the years since the passage of the JOBS Act, and the SEC’s implementation of those regulations. The term crowdfunding became synonymous with investing thanks to early companies like Fundrise, Realty Mogul and Crowdfunder, which were the first to use the term crowdfunding for investments. Over the past two-to-three years, the terms ‘crowdfinance’ and ‘crowdinvesting’ became a commonplace and more appropriate description for soliciting funds for investment opportunities from large numbers of unrelated individuals.
Though the term 'crowdfinance' now describes companies raising money from investors for equity capital or real estate investments, there is a mistaken misconception that capital raises are like crowdfunding campaigns. However, crowdfunding and crowdfinancing platforms, campaigns and business models differ dramatically in their goals, purposes - and end customer.
Crowdfunding is when people are asked to contribute cash and, in exchange, the contributor (or backer) receives a future reward. This reward ranges from exclusive front row seats at an independent movie, to the first edition of a special book or the excitement of being one of the first to own a new, innovative product.
The Pebble E-Paper Watch is one such example of a crowdfunding campaign. The developers began their quest seeking traditional angel investors but were only able to raise $375,000. In 2012, they began crowdfunding with an initial goal of $100,000. Contributors could pay $115 for a smartwatch that would sell for $150 once it went on the market. The appeal: a lower price and being the first to own the hottest new technology. With 68,929 people pledging money, the goal was met and surpassed within 2 hours. Six weeks later they generated over $10,000,000. After overcoming initial production and distribution issues, the watches were shipped to contributors. These backers did not make an investment into the company; they donated money to receive the first smartwatch. Those backers were happy with their return, because a watch is what they expected.
With crowdfunding, sponsors will tell their own story, using personal and emotional elements to raise funding, which often amounts to “selling” their product or idea. It is not about the brand; it’s about the individual product, talent, or service. Crowdfunding on public sites is now used as for pre-marketing, proof of product, proof of demand and pre-order testing grounds. In addition, many physical products are launched this way in the hopes of getting swooped up by established companies or investors. In the case of Pebble, they went on to market more smartwatches through incredibly successful Kickstarter campaigns, and they sold a lot of watches, but they didn’t build their brand, and in December of 2016 the company filed for insolvency.
Crowdfinancing is different. Investors aren’t looking to receive a product, a demo, or a perk. They want, and expect, a return on their investment. Simply trying to sell the same way one would sell a product or a crowdfunding idea be a quick path to failure. There is already a healthy dose of skepticism and a fear of scammers and fraudulent bad-actors when it comes to investing. We’ve all heard stories of innocent victims of a financial fraud, where great returns were promised to unsuspecting and trusting people, only to have the perpetrators take the money, and either not found or punished, and the monies never returned.
As a society, we have an inherent mistrust of ‘sales’ or salespeople, which is why that term is not used in crowdfunding, though the tactics of collecting donations are, in fact, sales tactics—with a spin. To introduce the idea that someone could ‘sell’ an investment online where it is easy to create a website, false documents and make claims without regulatory oversight, you are immediately facing headwinds of skepticism. How do you overcome this? Build trust, and build a brand. Trust and brand are both built on reputation, track record and the alignment of brand values to customer values.
With crowdfunding, backers are contributing or donating discretionary money in return for what amounts to purchasing a product. It’s almost like they’re going to the store - or, better yet, shopping for the newest products. They don't think about what a company can give them in the long run. They’re thinking about that cool smartwatch with the exciting features, and they can’t wait for the delivery day. Their money is for a purchase, and all they expect in return is the product they saw on the crowdfunding campaign page with its well-produced video and emotionally stirring narrative that got them excited.
However, with crowdfinancing, the approach must be different. As a company or a platform, your audience is investors and the psychology of an investor differs greatly from that of a crowdfunding backer. Investors aren’t shopping for a cool new prototype to show off to their friends, or feeling good about helping an artist launch an album. Investors are giving you their hard-earned money; their savings, their capital (for the express purpose of investing) with an expectation of a financial return.
A crowdfunding backer is likely satisfied with occasional updates to let them know where the product is at in development and how soon they can expect their shipment. These periodic updates are enough to satisfy their curiosity and their concern that they’ll get their reward. It’s much like receiving an update on a backordered item. If you knew it was backordered when you placed the order, you’re patient-- if you receive periodic updates on its progress.
Investors are far more demanding. They’re going to want to know the details; all of them, and up front. Where is their money going, what share are they getting, what is the expected return, what is the financial status of the company, what are the growth plans, etc. Investors will begin to analyze and pay attention to the details of an investment opportunity, and what they can expect back in the form of a financial gain.
Investors evaluating crowdfinance deals will not only analyze the details of the investment opportunity, they analyze the company; who are the founders, what experience do they have, and what does this company stand for, what is their reputation, can the company be trusted? Their biggest question will be, “Who are you and why should I trust you?”
If you want to solicit investment dollars through crowdfinancing, you cannot speak to a potential investor like you would in a crowdfunding campaign. You need to prove to your potential investors that you and your company have what it takes to make it in your market, with your plans—and that you can be trusted to deliver on the expected returns. You’ll need to demonstrate that you can build a business that lasts, instead of ending up in insolvency as Pebble did. No matter how attractive its potential return, you cannot simply ‘sell’ an investment opportunity with a good video, a slick website or an emotional hook. Crowdfunding tactics are not appropriate for crowdfinancing, and you must employ a longer-term, brand-centric view of your business.
A brand stands the test of time—think Apple. All one need do is see the Apple logo. Their stores don’t even need to carry their name on the sign. Unless you live under a rock, you know what that Apple means. A brand is more than a product. The brand stands for something and resonates with the public. A brand stands the test of time and is trustworthy. A brand has longevity and builds a loyal following. That loyal following creates long term customers who will buy not only that first product but each new product in succession.
A brand is not a product. McDonalds isn’t selling hamburgers and fries. McDonalds is selling the convenience of a quick and easy meal at an economical price. You can go into any McDonalds all over the United States, and you get the same thing, except for a few markets offering region-specific items. When you see the iconic golden arches while driving down the freeway on vacation, you can pull in with your family, and you know what to expect. It’s reliable and has created a loyal following.
When raising capital, a well-defined brand allows you to tell your story, earn trust and even get an investor excited about the opportunity that you are presenting to them. For several years now, the real estate crowdfinancing companies like Fundrise and Realty Mogul, as well as equity crowdfinancing companies Crowdfunder, SeedInvest and CircleUp have created trustworthy brands that have earned massive trust, and attracted investors. Their names are recognized and respected and the value of their brands is apparent: you can easily research them and the results they’ve achieved.
Creating a well-known, reliable and consistent brand is what makes investors want to give you their hard-earned money. They want to know they are doing business with a reputable company they can trust. That is brand.
To attract potential investors through the crowdfinance investment model, you must do more than just sell a product, talent, or service. Investors think differently than backers, and they spend their money differently with greater expectations. They are not engaging in a one-time transaction where they are getting a product shipped to them in return. They are not “shopping” for a new item. They are expecting a return on their investment. If you want to build a long-term relationship with an investor and their hard-earned money, you must earn their trust, and you can only do that by building a brand.
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