People Invest in People -- an Overlooked Aspect of Private Investing

Online capital raising still involves the core tenet of trust and a serious focus on what the entrepreneur is trying to build with a startup.

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By Joanna Schwartz

Opinions expressed by Entrepreneur contributors are their own.

To say technology has transformed the way people interact with one another, in business and personal contexts, is an understatement. Fifteen years ago, it was unimaginable that people would carry out such a broad array of efforts -- applying for jobs, managing finances, looking for romance -- on screens rather than in person.

While many activities did migrate online over the last two decades, one sector -- involving private investing and capital raising -- remained firmly in the land of in-person meetings and handshake introductions.

Related: What Entrepreneurs Need to Know About the Historic Change in General Solicitation Law That Goes Into Effect September 23

That changed in late 2013 when Title II of the JOBS Act was implemented, letting members of the public advertise private-investment offerings, through what is called general solicitation. Regulation D's Rule 506(c) is giving entrepreneurs direct, public access to accredited investors through online portals like that of my company, EarlyShares.

The ubiquity of online interaction has led many capital-raising entrepreneurs to some dangerous assumptions -- that the web can easily turn anonymous parties into long-term partners and that capturing investors' attention is more important than acquiring their trust.

But increased access doesn't always equate with converting prospects into investors. When pursuing an online capital raising, entrepreneurs (often filled with excitement and confidence about their companies) can overestimate their offerings' potential. Take a look at some typical (misguided) assumptions of entrepreneurs:

Related: 10 Mistakes to Avoid When Pitching Investors (Infographic)

Viral nature: "My company has great press coverage and a large social media following. If potato salad can go viral, so can my investment."

Mass appeal: "The media says investors are clamoring for growth opportunities in my industry. My business falls right into that category."

Immediacy: "This is a disruptive innovation. When people hear about my company, they're going to want to be a part of it."

Such assumptions can lead entrepreneurs to craft their investment offerings in the mold of Kickstarter campaigns. With the goal of generating headline-grabbing attention and earning instant investments, they incorporate flashy product demonstations, make over-the-top revenue projections, inflate market sizes and downplay or ignore the strengths of their competitors -- all at the expense of playing up their own entrepreneurial track records and business achievements.

Related: Win an Investor's Money by Acing These 5 Questions

Integrity drives investment decisions

The truth is that while virality, mass appeal and urgency lead campaigns to success in the world of rewards-based crowdfunding, they're not core tenets of general solicitation efforts. Both fields fall in the family of online fundraising, but crowdfunding and general solicitation are more like cousins than siblings.

Why is this so? The 506(c) regulation is not a transformative, disruptive change to private finance. It's an evolution of the traditional capital-formation process. That process was built on relationships, personal introductions and face-to-face meetings -- not hype.

Ultimately, when aspects of people's lives move online, things change but not everything. People apply for jobs online, but employers still check references before bringing hires aboard. Individuals manage their finances online but only with institutions that are trusted. Consumers seek potential mates online but get to know them before committing. Many of the old rules still apply.

Private investors -- then and now -- invest largely according to what they see in an entrepreneur. A successful appeal is one made to the values that drive investment decisions, and all this relates to the entrepreneur seeking funding, who he or she is, what this individual has accomplished and what he or she is building. Here is a sampling of this kind of thinking and the related questions that an investor might ask:

Related: 5 Questions the Right Investor Will Ask You

Reputation: "What's your story? Who's on your team? What partnerships have you established? Who believes in you, and why?"

Track record: "What is your experience in this market? What are your successes? Your failures?"

Traction: "What momentum is behind your business? What are your goals? What progress have you made in reaching them?"

Certainly, grabbing attention is important. With a general solicitation, entrepreneurs need to make investors care about their company and see it as a high-potential opportunity.

Showcase strengths in a compelling way, but do it with integrity. Projections must be realistic, the estimation of market size should be reasonable and any competition acknowledged.

One of the most valuable benefits of general solicitation is its ability to inject greater transparency into the capital-formation process. As an entrepreneur raising capital, embrace that transparency. Overhyping a deal will serve only to cloud investors' perception of the company's entrepreneurial merits. They're investing in the entrepreneur -- and an opaque, inauthentic deal is the easiest kind for investors to see right through.

Related: 25 Reasons I Will Not Invest in Your Startup

Joanna Schwartz

Co-Founder and CEO of EarlyShares

Joanna Schwartz is co-founder and CEO of EarlyShares, a Miami company with an online platform that gives accredited investors direct access to private opportunities in real estate, growth companies and investment funds.  

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