Do investors care if your startup has a “big name” shareholder?
Tuesday, March 7, 2017/
Every one of us is probably guilty of name dropping at some point.
If executed well, the positive associations that derive from name dropping can lift the perceptions of one’s position in the social hierarchy. In the corporate arena, these are the same positive associations that drive organisations to pay top dollar for highly regarded brand ambassadors.
In the world of startups where funds are somewhat tighter, this effect is often achieved by bringing on a “big name” investor. As an example, telco and advertising startup Unlockd recently achieved some positive attention around its “high-profile investors” (Lachlan Murdoch and Greg Roebuck). The backers behind fintech startup SocietyOne (Westpac, Lachlan Murdoch, and Packer) are regularly mentioned in media stories flouting its success.
In fact, finding a big name investor might even be considered an integral part of any startup’s corporate strategy. Here are some of the reasons a big name investor can help boost your startup’s profile and, in turn, your capital raising prospects.
1. Nobody Likes Being First to The Party
It’s human nature to be cautious about being the “first mover”. A classic example is café display cakes, which usually have a slice cut out, even if no one has purchased a piece yet, to reduce the anxiety of being the first customer to cut into the cake.
Where money is at stake, investors are always looking for external validation that their financial risk in a transaction will not outweigh their potential return. One high-profile investor on board will give other potential investors confidence that the firm has a solid business model and is ready for capital appreciation.
2. Even investors get FOMO
Not all investment decisions are driven solely by logic.
FOMO, or “fear of missing out” is a well-documented motivator for investing in a company. In fact it’s often the main reason for investing, according to Silicon Valley’s Shark Tank pioneer Mark Cuban. By promoting that a big name investor is interested in your company, you’ll be communicating that you’re a Really Big Deal that can’t be missed.
3. Lead investors can streamline your efforts
In most early stage capital raising rounds – if there are multiple investors – usually one of the investors takes the lead role. The lead investor might negotiate the term sheet, carry out the due diligence, talk to customers and staff, and negotiate the shareholder agreement on behalf of all the investors coming into the capital raising round. This early investor can help streamline the administrative process of bringing on future investors.
4. Big names can build much-needed media hype
In today’s booming Australian startup market, standing out from the crowd can be challenging. What you’re looking for is a large media outlet to pick up the story, detail your funding success, and – most importantly – detail the product you’re bringing to market. If you have a big name on board, you are far more likely to achieve the headlines you’re looking for.
5. The bottom line
A well-known investor or board member is highly likely to help you to attract capital, staff, and customers. With this said, however, it’s important not to focus on high profile investors to the detriment of your operation.
No high profile investor in the world can compensate for a poorly run business. Focus on the fundamentals of your business and product offering, and the big names will follow.
Philip Alexander is the executive director at Jacanda Capital.
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