Social Proof: The Best Approach to Start-up Fundraising

A good number of start-ups get funded by investors. However, there is a basic yardstick amongst others which helps most investors to easily detect which start-up to fund. This quick detector tells them whether or not to stick their heads into unknown waters. It is called Social Proof.

Social proof is a shortcut for prompt investment decisions. When an investor asks a start-up for an existing investor or an investment lead before agreeing to fund the business or idea, he or she is asking for Social Proof. The existence of another willing investor somewhat provides a mental cushion and assurance of a worthwhile investment.

From past experiences, several start-ups have learned that raising funds from scratch can be one of the most difficult expeditions. Avoiding external funding or outside capital can be a way of avoiding extreme impact of losses. However, it only provides a temporary cushion, creates a complacent sense of comfort which ultimately hinders growth and expansion. So, here are 5 lessons extracted from their fundraising experiences.

1. Smart investors will not fund tiny myopic projects. They would rather fund your vision, so, dream BIG! Develop a bigger global picture which would inspire them to see the future potentials in your idea or business, and then agree to cover your budget.

2. Think like an investor. Investors all have one thing in mind – Return on Investments (ROIs). They fund a vision they believe in because of the benefits. You need to understand market realities and come up to their level. They aren’t expecting you to ask for some small amount. So take your business above that $50,000 level, begin to build a million dollar capacity business and make projections based on the future. That way, your pitch will get their attention faster. Remember, they all have one thing in mind – the higher the risk, the higher the returns.

3. No matter how good your idea is, some investors would ask for Social proof. Do not try to convince that investor. Simply go and do your research, return with the result and you’ll get their buy-in instantly.

4.You must ask yourself, ‘am I willing to take the risk of having external funding, whilst bearing in mind the numerous advantages it would have on my business?’ Do you want to remain mediocre and risk extinction like most start-ups or do you want to grow?

5. Be willing to play the investors’ game and walk within specific preferences and strictly on mutual agreement? Are you willing to share profits?

Note that there is no perfect route. Your choice to deal or not to deal with investors has its peculiar upsides and downsides. Whichever way, raising capital or funds is essential for sustaining any start-up enterprise.

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