In the old days, telephone operators connected parties so they could speak to each other. Sometimes, the operator couldn’t get the connection to work. Although a basic analogy, that’s what I see happening when we ask some angel investors to connect with crowdfunding opportunities. The line gets disconnected.
The 4 Most Common Objections
It’s understandable why small business owners want to connect with traditional angel investors. But let’s take a look at why some angel investors are more likely to be reluctant to participate in crowdfunding opportunities.
Crowdfunding for Investors
- Static On The Line
- Getting A Busy Signal
- Sorry, We Missed Your Call
- The Number You Have Reached Is No Longer In Service
Traditional investors — angels and venture capitalists — are heavily invested (pun intended) in the status quo. They’re motivated by a financial return on invested capital and they like being in control of the terms of the deal. Crowdfunding puts control into the hands of the crowd. Literally. And when a focus other than direct financial return is introduced into a deal, such as community backing for a business that would allow it to continue to operate and expand locally on less favorable terms then the status quo, traditional investors start hearing a lot of static. The message is not intelligible to them. We’ll have to wait for a paradigm shift to occur before that static subsides. Until then, expect traditional investors to be a little fuzzy on the crowdfunding concept.
Traditional investors prefer to negotiate directly with one or two people in a deal who either stay in the deal or ultimately get bought out. Simple. Under crowdfunding, traditional investors feel like they’ve dialed into a multiparty phone line. How do you talk when all these people are on the same connection? How do you get all these people to vote and to get off the line? Currently, there is some discussion around the concept of crowdfunding funds, a centralized purchase concept gaining popularity.
Basically, crowdfunders could nominate a shareholder who would exercise control over the equity units. It’s like in a cooperative condominium situation. All the residents are members, but they don’t all have a vote. They do, however, have to go along with the rules of the issuer. Until this kind of structure or others similar in nature are implemented to make future investment rounds less cumbersome, traditional investors aren’t going to be happy talking on the crowdfunding party line.
Traditionally, angel and VC investors receive most private investment offers from a community of people they know and trust. Some even come to their offices to submit proposals, usually on paper. Some traditional investors have not connected to new social media channels and, as a result, don’t see these opportunities as a potential new channel for deal flow. It could be an age factor; Boomers versus Gen X and Y. It could also be a factor of first or second-generation wealth. First generation investors such as Mark Cuban, who made their wealth as an entrepreneur, understand first-hand the challenges startups face and tend to be more comfortable with the associated risk of a crowdfunding investment.
Many second generation investors who have inherited their wealth are more comfortable in following the traditionally established guidelines of their investment advisors. Until these investors begin to lose out on the next Facebook or Google that evolve from an initial crowdfunding raise, expect them to watch and wait.
Traditional investors can be wary of crowdfunding because legislative rules are still uncertain even after so much time has passed since the JOBS act was enacted. They worry that the SEC could introduce additional rules that might make crowdfunding even more costly and cumbersome from a compliance standpoint.
- What about potential liability to the issuer and investor?
- How costly will compliance be?
- Will they be disadvantaged by future changes in the regulations?
Many traditional investors are hanging back waiting for legislative and regulatory issues to become final and tested in the marketplace. Many want to see how these investments play out first, before they get into the game.
Until the new SEC regulations are settled and deal flow established, expect traditional investors to be very cautious about crowdfunding.