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It can be tempting to adopt a Luddite view of crowdfunding websites. “They can simply upload a flurry of presentations and see what sticks.” Yet these platforms have evolved into some of the most effective online matchmakers. 40% of Seedrs and 50% of Crowdcube startups reach their funding goal, while their German peers even score success rates of 90%+ (eg. Seedmatch and Companisto). What then is their winning formula?
German-based academic Jonas Löher (2017) decided to delve into this through structured interviews with the 9 largest crowdfunding platforms of his country (c. 90% of the market). He finds that the word “Nein” often passes their lips. Only c. 20% of initial applicants are invited to an interview with the platform’s business analysts.
Like an elite dating agency, they have amassed a strong sense of the needs of their niche of would-be suitors. Some focus geographically: “the investor and the business (…) can see each other within 2 hours”. Others prefer tried-and-tested business models: “conservative (…), instead of the next Facebook or Instagram”. While one acted quasi-revolutionary, wanting “the potential to inspire people”.
Many acted as though they had skin in the game themselves. They desired a “clear conscience when people invest” as they recognise the symbiotic relationship between their own growth trajectory and that of their startups. Most therefore considered the ability to secure follow-on financing a critical selection factor.
This wooing process often takes them on the road. Almost all platforms prefer sourcing deals themselves at startup events or through media reviews – even those that only review 15-20 proposals per month. The second best channel is their network of consultants and business angels. Cold applications are often dismissed. “Just a few of those companies are worth a serious discussions. There are exceptions – but they are rare.”
While they manage an online community, they value the ability to rub shoulders with their entrepreneurs. A lengthy physical meeting is often an essential part of late-stage due diligence. If you can’t convince me in person, how do you expect to lure my clients on the internet?
After validating a startup, crowdfunders morph into mentor figures. Close attention is paid to the layout of the online campaign, with multiple correction loops being the norm. The aim? To make a “profile as informative as necessary and as entertaining as possible”.
Does this behaviour remind you of someone? Löher suggests that introducing a startup to the gatekeepers of the masses is rather akin to preparing it for a VC round. It takes background research, personal introductions and a healthy dose of luck!
Löher, J. (2017) “The interaction of equity crowdfunding platforms and ventures: an analysis of the preselection process”. Venture Capital 19(1-2): 51-74
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