In crowdfunding, momentum is king

The investors who use Seedrs fall into two broad categories. Many are independent investors, people who have come to Seedrs to browse, discover and invest in great startups. Others are network investors who have used Seedrs to invest in a specific startup.

For a startup seeking capital through Seedrs, the independent investors often seem like the more exciting of the two. These are people whom the entrepreneur has never met before but who are so inspired by what they see that they decide to join the startup on its journey by putting their capital into it.

Network investors, by contrast, involve a lot of hard work to mobilise: the entrepreneur has to reach out to them through online and offline media, tweeting, Facebook-ing, attending networking events and putting in long hours in lots of other ways to drive them to invest in their business.

But if there is one secret to success on Seedrs (or on any equity crowdfunding platform), it is this: independent investors will only invest meaningfully if they see that the deal has momentum; and the only way to create momentum is to get network investors to invest the first chunk of capital.

We recently looked at all of the startups that have gone live on Seedrs since we launched, and the following graph shows just how critical momentum is:

Data based on July 2012 – June 2013 Seedrs listings
Data based on July 2012 – June 2013 Seedrs listings.

These figures speak very clearly:

  • Of all the startups that have listed on Seedrs, slightly fewer than 15% have hit their end target. In other words, starting from nothing, you have about a 15% chance of making it.
  • Those startups that managed to raise the first 1% of their target saw their odds of success increased to slightly over 27%.
  • The ones that hit the 5% funded mark had nearly a 50-50 chance of making it all the way.
  • Those that made it to 10% funded saw their odds of success increase to over 70%.
  • Making it to 20% brought the odds above 80%.
  • Startups that made it to 30% funded had a 90% chance of funding.
  • And, perhaps most importantly, every startup that has hit 35% funded has gone on to get their full target.

It is worth bearing in mind that this data comes from just our first 11 months, and over time the number may move around a bit (there will certainly be companies that make it above 35% but don’t end up going all the way).

The core message is this: if you want to stand a strong chance of successfully raising capital through Seedrs, you will need to mobilise your networks to invest at least the first 30% of the total capital you are seeking.

This message is very much in line with what project creators who use Kickstarter have understood for a while. We have long been hesitant about the comparison between Kickstarter and Seedrs, because while we admire the rewards-based crowdfunding space very much, we think it is vastly different from investing in startups. But on the issue of momentum, there is a strong similarity, and the successful Kickstarter projects are the ones where the creator uses a combination of friends, family, extended networks and media to generate interest in the project. In fact, according to The Kickstarter Handbook, 84% of Kickstarter pledges come from people who arrived at the relevant campaign from an external link; only 16% are from people who were browsing Kickstarter and found the project that way.

So why do independent investors wait to see momentum from network investors before investing? We think there are two reasons.

Momentum proves that you know how to market your business

One is that they want to see that the entrepreneur is willing and able to do the hard work to bring in network investors. Starting and growing a business is gruelling stuff, and it involves huge levels of persistence and energy in everything from generating sales to hiring talent; if you won’t show that kind of persistence and energy in raising your first capital, independent investors feel, what are the chances that you will do so in other areas of the business?

Momentum validates the demand for your product

The other reason is that that’s how human behaviour works. People like to be part of something that’s “hot”, that’s generating lots of excitement and moving quickly. Part of this is a rational reliance on the wisdom of the crowds: if lots of other people are so convinced this startup is worth backing, that can be a relevant data point in making an investment decision. And there is also a more emotional component, as people like to feel that they have gotten into a deal that is special and exclusive.

Whatever the reason, the facts are undisputable. If you can bring the first 30% of the capital you are seeking through your network investors, you stand a very strong chance of getting independent investors to invest the remaining 70%. Meanwhile, if you’re not prepared to do the work to mobilise a network of investors, that is a perfectly fair choice, but crowdfunding probably isn’t for you.