You want to build your business, but that can be impossible without investors. So you decide to make an offering to attract people who want to support your goals in exchange for a return on their investment. The problem is that not many people seem to be interested. Is it the offer? Is it something else?
The chances are good that there may simply be too much friction. Investors are driven to invest. They want to allocate their money to work on their (and your) behalf. However, if there’s too much friction, they may take the easier route and go elsewhere. Remember – investors are a lot like water and are inclined to take the path of least resistance. If you want to gain a competitive advantage, it’s important to overcome that obstacle.
However, there’s positive news: it’s entirely possible to smooth your investor’s path and make your offering more appealing. The key is to identify – and then eliminate – any friction points. In this post, we will explore the top four things you can do to eliminate investor friction in 2022. It’s time to remove the hurdles preventing investors from placing their trust, and money, in your offering.
What Is Friction in Investing?
Before we take a deep dive into the discussion of how to eliminate friction, it’s important to establish what “friction” means in the world of investing. Put simply, investment-related friction is nothing more than something that stops someone from taking action.
In this instance, we’re talking about things that can stop a potential investor from investing in your offering. What sorts of events or behaviors can do that? There can be many hurdles, including:
- A lack of understanding of how investing works;
- A lack of transparency surrounding your business or your offering;
- Unnecessary complexity in the investment process;
- Unaddressed pain points that lead to a poor fit; or
- Additional costs that make an investment less appealing (such as fees, commissions, interest, etc.).
How Does Friction Affect Your Offering?
Why does friction matter so much? It will always be present, and you cannot eliminate it, so why should you care? To slow friction, you must remove as many bottlenecks as possible. What is a bottleneck, though?
A bottleneck is nothing more than a point of congestion. However, despite that simple answer, bottlenecks can wreak havoc on your fundraising efforts.
Here’s a quick look at how things might look:
- You reach 100 potential investors with your offering through initial outreach efforts like email or social media.
- On learning more, all 100 people are interested and want to give you their money to generate a return.
- They begin the process of learning more, only to encounter a bottleneck.
- That bottleneck (whether it’s a lack of information, hidden pain points, a lack of transparency, or something else) slows the flood of 100 people to a trickle. Instead of 100 new investors, you might have five currently, and then a few more, and possibly a few more later.
Bottlenecks slow your efforts and reduce the chance that all 100 original investors will decide to put their money into your offering. They create long waits, and time is often your enemy because the longer they wait, the more likely it is that potential investors will go elsewhere.
It’s not just bad news for your investors, though. It could mean the difference between having enough funds to get your business off the ground, not just immediately, but at all. Bottlenecks can mean massive delays, missed deadlines, and other crises.
All of this is because of friction inherent in the investment process. So, how do you overcome these issues and build a stronger business in 2022? One of the most critical investment strategies to master is eliminating friction through smart decisions and actions. One of the most important approaches is ensuring that your potential investors have all the information needed to make a sound, calculated decision with their wealth.
Educate Your Investors
The first thing you want to do is educate your investors and inform them of your purpose and the problem you are looking to solve. This speaks directly to the heart of your business. Try to answer these questions for yourself, and you’ll have a better idea of how to communicate the information to potential investors:
- What does my business do?
- What pain point or challenge does my business address?
- How is it different from other businesses doing the same thing?
- Are there any other businesses doing the same thing?
- How likely is my business to deliver a reward to someone who chooses to invest in it?
- How do costs factor into the equation, and how might they be increasing friction?
Take the discussion beyond what you do or what your business does. For example, if you’re a real estate entrepreneur, talk about why real estate investing is so important in the first place. Then, dive into the things that get you excited about the project and what should excite your potential investors. Talk about what a cap rate means, for instance. Or, if you’re in artificial intelligence, talk about what artificial intelligence means, how AI will change the world, and how it works.
It’s also important that you begin the investor’s education long before it comes time for them to write that check. Provide them with information before they’re ever asked to invest so that by the time they reach you, they’re fully informed about everything and already trust you. Without that trust, you’re never going to close the deal. And, today, building trust means providing plenty of information from the outset.
Of course, it might not be a lack of information preventing potential investors from buying into your offering. Instead, it could be hidden complexity within the investment process itself.
Simplify the Process
The second step to eliminating friction is to make it easy for people to invest. With access to modern crowdfunding platforms, there is no reason you can’t make this an enjoyable experience for investors. With the right software, it should take the click of a button to enter their credit card or bank information. They should be able to complete the process in seconds.
Too often, companies try to raise capital using money wires, checks, and clunky paper subscription agreements. These do you no good, and they certainly don’t make things easy for your potential investors. Remember; the more complicated the investment process, the fewer investors will make it through to the end. So keep the old design principle in mind: “K.I.S.S.” – Keep It Simple, Stupid.
Of course, that means doing your due diligence when it comes to the crowdfunding platform that you use. Choose your option based on a few specific qualities:
- Availability – Make sure that the platform has a track record of accessibility and reliability. Downtime should be minimal or nonexistent. Your investors should also be able to invest at whatever time works for them, whether that’s 2 PM or 2 AM.
- Security – With the rise of cyber threats, this one should be that proverbial “no-brainer,” but we’re going to mention it anyway. Make sure the crowdfunding platform you choose uses state-of-the-art encryption technology to protect yourself and your investors (as well as to minimize potential friction).
- Ease of Use – This one is also paramount. If the platform’s not easy to use, you’ll lose investors along the way and lose your competitive advantage. The platform should be easy to understand and have an intuitive interface.
Of course, none of this does you any good if your potential investors have unanswered questions about the investment, your business, the potential return, the risks they’re exposed to, or something else altogether.
Answer Your Investors’ Questions
Investors want to generate good returns while minimizing risk. They also want to make investment decisions based on accurate information, which often means getting answers to questions before deciding to invest. So please make sure you have someone available to answer those questions when they arise. This could be you, or it could be someone you designate for the role. If you choose to appoint someone, make sure they’re very knowledgeable, as a lack of information or inaccurate information will damage your reputation and lead to investor defection.
You also need to ensure that you answer those questions when they’re being asked. That means being there for investors before they invest and providing them with answers after they’ve already put their money into your offering.
By simply being there for them with accurate information, you build trust and become a valuable resource to your clients. With that being said, no amount of information will encourage investing if you’re unable to address hidden pain points your investors might be experiencing.
Eliminate Pain Points
All investors have pain points. It’s your job to identify, address, and eliminate them. How do you do that, though? In limited instances, you may know some of your investors personally if they’re family members or friends, but how do you eliminate pain points for strangers?
It’s critically important that you have an investor avatar and that you’re intimately familiar with who your investor is. An investor avatar helps you dial in that image so you can proactively identify pain points and address them. But, of course, this begs the question – how do you create an avatar in the first place?
Let’s first define what an investor avatar is. It’s nothing more than a well-defined picture of the particular type of investor you want to attract to your offer. This includes accredited and unaccredited investors, but you must take the process deeper. To help you flesh out your avatar, answer the questions below:
- What are the one or two types of investors you want to focus on primarily (financial or strategic)?
- What is their history of investing?
- How does that history touch on the type of offering you have?
- What risks are at the top of their mind when considering investments?
- Why would they not invest in your offering?
- What is their average education level?
- How knowledgeable are they about this type of investment in the first place?
- What is their timeline for a return on their investment?
- How much risk tolerance do they have?
- How much disposable income do they have to invest in the first place?
- How would the loss of their investment affect their quality of life and/or their ability to support their families?
By answering these questions, you can begin to flesh out an accurate picture of your investor. Once you do, you’ll be able to identify pain points and find ways around them or better target your marketing to avoid potential investors whose pain points you cannot address.
A Frictionless Market
By removing as many sources of friction as possible, you create a much smoother process for investors to reach you. As a result, you’re able to remove bottlenecks, increase the speed of buy-in, and ensure that you’re attracting just the right kind of investor to your offering.
However, don’t believe the myth of the frictionless market. The idea here is that by removing all friction, you can create a seamless process where you never lose an investor along the way. The problem is that to create a true frictionless market, you’d need to remove all costs and restraints, which is impossible. So the best you can achieve is a reduced-friction environment.
With that being said, you don’t need a frictionless market to experience success. You need to eliminate as much friction as possible for your investors. Use the tips we’ve just discussed to do that, and you’ll find that your fundraising efforts deliver much better results.
If you’re looking for an experienced legal team to assist with your next offering, Crowdfunding Lawyers is here to help. Click here to schedule a free consultation and we will follow up with you promptly.