Referring to any investor, whether large or small, as “unsophisticated” is likely to be taken as insulting or demeaning. Small investors often play a pivotal role in financing some very strategic equity crowdfunding deals. Moreover, the idea of a sophisticated large investor is not mutually exclusive. We’re likely all well-acquainted with a few highly-sophisticated investors with very few assets. The rest of the investor outliers can likely be placed in the “dumb money” category. Both are rare breeds indeed. The latter group represent the proverbial “big game” of many an investment manager. Predictably, the majority of investors fit fairly snugly into their respective buckets: the sophisticated with high net worth and the unsophisticated smaller investors. Targeting both groups requires altogether different mediums and methods, but as crowdfunding gains more legitimacy and mass appeal, companies seeking equity financing through the crowd will likely require the mutual support of both sophisticated and unsophisticated investors alike.
Traditionally, private companies have sought-out high-net worth investors for raising capital for operational and growth needs. The reasoning behind this singularly focused investor targeting strategy was threefold. First, the law didn’t allow the “general solicitation” to investors with total net worths below a specific threshold. Second, it was easier to procure the requisite financing from a smaller group of investors with deeper pockets. This also meant less investor drama and a smaller likelihood of immediate liquidity demands from a larger group of subscribers. Lastly, such investors would typically act in full partnership, providing assistance to a broad network of business associates willing and able to help a fledgling enterprise succeed.
Times have changed. General solicitation bans have been lifted across countries states and territories. The internet now provides platforms where investors of all walks of life can easily co-invest with smaller minimums. Combined with social media outreach tools, promotion of equity shares is also simplified as well. It’s what some have deemed the true democratization of capital.
In short, it’s now easier than ever to target both groups simultaneously through their various niches and circles of influence thanks to the brilliance of the internet. But, that doesn’t mean targeting a broad investor audience is the right move every startup or equity crowdfund campaign. There are some qualifiers that may prove helpful in knowing whether your best investment strategy involves targeting high net worth clients or if it makes more sense to move down market:
Not only is the marketing of both groups different, the structure of a deal is often greatly dependent on what types of investors you have on board and the number in the deal.
Structuring Deals to Include Smaller Investors
Let’s face it, without the proper deal structure, bringing in large quantities of unsophisticated and unqualified equity investors could present a nightmarish scenario for businesses seeking capital.
But their money is as green as anyone elses and a quickly-executed financing is better than none at all. Perhaps the best way to avoid the headaches inherent in investor relations with the unsophisticated, while at the same time ensuring specific deals become fully “subscribed,” is with a General Partner/Limited Partner deal structure. Depending on who is structuring the deal, a General Partner in the opportunity will manage the direct relationship with the founders and entrepreneurs while smaller investors simply pool their funds into a Limited Partner entity, keeping them one step removed from the direct investment management relationship with the founders. And, since most country and state laws cap the amount any single investor can put up in a year to a percentage of his/her income, it also protects investors from themselves.
The options and opportunities in crowdfunding will continue to shift. This relative flux in the industry will breed opportunities for both investors and entrepreneurs alike, especially as the industry graduates through the growing pains of a nascent asset class. When it comes to investor targeting, the idea behind crowdfunding itself includes the opportunity for any Johnny-come-lately to invest in big ideas and opportunities. Whether targeting the broad market is right for the entrepreneur, is simply a matter of personal preference and business strategy.
Nate Nead is the Managing Director of Crowdfundraiser.com, a U.S.-based financing and crowdfund investing company focused on both sophisticated and unsophisticated investors. He and his team help provide public liquidity to private companies financed through crowdfunding campaigns. He resides in Seattle, Washington. You can follow the company @Crowdfundraise.
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