Pre-arranged capital and momentum: Is real money being raised through online marketplaces?

Here is a high level view on investment trends across Snowball Effect's offers to date, and the factors that tend to have a positive impact on the successful ones. We look particularly at pre-committed capital and momentum.

Every offer has unique dynamics. For example, each industry and company risk/reward profile will appeal to different groups of investors. Some offers have better media coverage. Others will have a head start through a large existing customer or user audience.

We can't predict with certainty how investors will react to any given offer. However we've learnt some lessons from the offers that have been most successful in our marketplace. We've also picked up on similarities between the offers that haven't received as much investor interest.

First though, here are a few investment statistics based on offers through Snowball Effect. Over the last 12 months we've seen a large increase (171%) in the size of individual investments. We believe this is due to investors becoming more familiar and comfortable with Snowball as a marketplace, some offers having higher minimum investments, and a focus on attracting experienced investors that tend to invest larger amounts. We've also seen an increase in the number of repeat investments. The people that are sticking, seem to be people that are more serious about increasing exposure to private equity in their portfolios.

It's worth noting that the minimum investment size is $1000 for many offers, so the average gets dragged down significantly by a long tail of small investments.

Pre-arranged capital and lead investment

Many companies commence their Snowball Effect offers with a portion of capital from investors who have already committed to invest. To date, an average of 15.8% of all investment through Snowball Effect has been pre-arranged before each offer has gone live. The balance has come from the Snowball Effect retail and wholesale investor databases, the general audience of the companies (such as customers), and the general public who become aware of the offer.

Pre-arranged capital can help to generate momentum early in the offer period. Some investors will only bother to read an offer properly if they can see some social proof from other investors. Some investors will feel more urgency if the offer is starting to fill up - they need to assess the offer and decide whether they're in or out before the opportunity is gone.

But the most important form of pre-arranged capital is that being invested by a credible lead investor. A credible lead investor is more than just someone injecting cash into the company. It's an individual or organisation that has a deep understanding of the investment proposition, and has a reputation for making successful investments in the relevant industry.

We encourage companies raising through Snowball to seek a credible investor to lead their offer. In some instances Snowball has sourced a lead investor from within our network of wholesale investors. Sometimes the details of a lead investment are included in the offer disclosure (if the investor is happy with that). This can be an important reference point for other investors.

Lead investors bring the following value to an offer:

• Credibility: An investor that is known in the New Zealand investor community, or that is respected in a specific industry, is likely to encourage others to invest early in the offer period. This is true throughout the capital raising landscape, such as with angel investor groups, where the company raising capital will often be introduced at pitch events by a reputable lead investor in order to instil confidence that the offer is to be taken seriously.
• Validation: A lead investor with industry experience is usually well placed to validate the opportunity being presented to other investors. Someone who understands the product, the market opportunity, the credibility of the strategy and forecasts, and the skills required in the team, is an excellent person to be fronting the capital raise as other investors are likely to find some comfort in this investor's decision.
• Valuation: A credible lead investor can help to validate the pricing of an offer. These investors will often have experience investing in the relevant industry and have performed in-depth due diligence before negotiating the terms of the offer including a fair valuation. While companies often support their pricing with information such as comparable valuations or external valuations, we believe there is no better gauge on the reasonableness of pricing for new investors than an industry-experienced investor that has had the chance to get close to the company and is investing a significant amount at the same price as everyone else.

To date, only three offers through our marketplace have failed to reach their minimum investment target. While investor feedback suggests that various factors may have influenced the lower investor demand for these offers, the one thing all three offers had in common was that they lacked a credible lead investor for the round.

Investment trends

It's early days for online investment in New Zealand, and we're still seeing very different investment patterns across offers. However, here are a few factors that tend to have a positive impact on investment during the offer:

1. The rate of investment often increases once the "minimum funding target" has been reached. Some investors seem to sit on the fence until they have some certainty that a deal will close successfully. We've recently changed our payment process so that investors can choose to pay at the end of the offer period rather than immediately after making their investment. We hope that helps to encourage investors to commit as soon as they've made a decision to invest.
2. The rate of investment usually increases once scarcity is a factor (there is either a small number of shares still available or limited time remaining before close of offer).
3. Large single investments are usually followed by a series of smaller investments. Some investors seem to derive confidence from seeing large investments being committed.
4. Television and significant media coverage usually has a very significant impact on investment. Spikes in investment are typically event-driven.

Final words

We're pleased with how the online marketplace is maturing. A wider variety of deals are coming through (you'll see more on that in the next couple of months). Investment sizes are increasing. And repeat investments are increasing. This is partly due to the growth of our wholesale investor audience.

For those considering raising capital online, the most important part of offer preparation is to have an attractive proposition and high quality information. Once those grounding blocks are in place, it's time to work on the other aspects that can influence success such as pre-committed capital and initiatives to generate momentum.