Sophisticated and Retail Investors
Investors can be divided into two types: retail investors and sophisticated investors. Retail investors are investing more emotionally. Sophisticated investors typically invest more than retail investors, but the amount they invest doesn’t necessarily reflect their level of sophistication.
While it’s definitely more a spectrum than two clear camps, there are some common identifying features:
- Retail investors make their decisions based on emotional attachment / Sophisticated investors made decisions based on rational attachment.
- Retail investor goes with gut decision / Sophisticated investors have appraisal process.
- Retail investors will typically look for pros / Sophisticated investors are looking for cons.
- Retail investors = heart first / Sophisticated investors = head first
- Retail investors are gambling with disposable income / Sophisticated investors view crowdfunding as one of the riskier assets in their portfolio.
- Retail investors want to be part of a journey / Sophisticated investors are investing to make a return.
Some critics have claimed that retail investors shouldn’t exist at all. I find this view patronising. Firstly, as long as you are aware of the risks, then it’s your money to do with as you will. Secondly, I’ve seen many well-managed and institutionally-funded companies still go on to fail. Risk exists everywhere. But is it any less noble to invest in something because you believe in the idea, rather than investing simply to make a profit?
And the crowd has proven it has greater foresight than you’d think. The data suggests the crowd is often as good at predicting the future success of a company as professional analysts. It’s not surprising, really. The crowd is representative of the market.
How do to stand out?
What can you do to appeal to both kinds of investors?
Assuming your company is in a healthy state, organise a consumer marketing and PR campaign to hit at the same time as your crowdfunding campaign, you’ll be able to update investors with your progress in real time. Having a buzz about your company during your raise will drive retail investors to your campaign and give sophisticated investors confidence.
What turns investors off?
There are some faux pas that you need to avoid entirely, including:
- Not doing your homework.
- Not answering questions openly on the public forum.
- Not including a financial model.
- Not making yourself available during the campaign.
Profit versus Passion Investments
We’re living in exciting times. We’re starting to see the potential for many of the world’s problems being solved by innovative startups, powered by the crowd.
These startups, known as passion projects, or investments are exciting, world-changing and predominantly supported by retail investors.
But, I believe, companies that can attract the full spectrum of retail investors and sophisticated investors have the best chance of success. Businesses need savvy investors and they need people who feel passionately about their cause.
So, how will your business attract both profit- and passion-led investors?