Social Capital IS the Crowdfunding Fuel

I’ve said over and over that the best part about our job is meeting and talking to incredible entrepreneurs. I’m always struck by the intelligence and insight they bring to the process. Recently, I’ve had the pleasure to know and learn from Delmonize “Del” Smith. Del is President and CEO at D.A. Smith & Associates as well as an Assistant Professor of Management at the Rochester Institute of Technology. He’s done extensive research into social capital and the importance of trust in venture creation and development. Reading his research was like seeing the recipe to the secret sauce of ProFounder raises. In addition to launching his own raise and contributing as the ProFounder Group Advisor for Rochester, NY, Del has graciously taken time to share his knowledge on the ProFounder blog. I’m sure you’ll enjoy Del’s insights as much as I did. Enter Del…

The term “crowdfunding” is a bit of a misnomer in that it conjures up images of large groups of people indiscriminately throwing money at an entrepreneur. While the thought of receiving money in this manner is undoubtedly every entrepreneur’s dream, it is really not the basis of crowdfunding.

Profounder takes a more realistic approach to the notion of crowdfunding when they say, “raise investments for your business from your community” (italics theirs). The community by which Profounder refers is much different from a “crowd” in that embedded within that community is a set of ties that make up the entrepreneur’s relationship network. Such ties form the entrepreneur’s “social capital”, or the sum of the resources embedded within and derived from a relationship network (see work by Mark Granovetter).

Make no mistake about it…social capital IS the crowdfunding fuel! In other words, it’s the resources available within entrepreneur’s relationship network that, when accesssed, power a successful crowfunding initiative. We know that an investor is much more likely to invest in an entrepreneur when they have an established relationship with the entrepreneur than when no such relationship exists. Therefore, any crowdfunding initiative will depend, in part, on an entrepreneur’s ability to proactively accumulate and access social capital.

Many entrepreneurs looking to use crowdfunding to raise money for their business will ask, “How much money should I ask for?” Based on premise that social capital is the crowdfunding fuel, the following equation may assist entrepreneurs with answering this question.

Raise amount is a function of the financial requirements of the business, the amount of social capital available in the relationship network, and the ability to access that social capital

Needless to say, financial requirements are what they are. However, the amount of social capital available to an entrepreneur is a factor determined by activities conducted prior to the raise. These pre-raise activities include an entrepreneur proactively working to cultivate relationships in his or her network. This cultivation sometimes means evaluating the structural (e.g., diversity, socioeconomic status, business acumen) and relational (e.g., familial, strength of relationship, history of exchanges) aspects of the network. For example, an entrepreneur with a technology related business may want to spend time attending local technology user groups to cultivate relationships with people who have greater understanding of the nature of the business (structural). This same entrepreneur may also want to be sure to attend the next family reunion and strengthen some family ties (relational).

The third part of the raise amount equation, accessing social capital, deals with activities enacted during the raise period. It is during this time that the entrepreneur must tap into this fuel: email invitations and follow-ups, phone calls, lunches, and the various other forms of persuasion. When putting together the Raise Timeline (an estimation of what to expect from the process) Profounder included “Investor Outreach” as a main category to emphasize the importance of cultivating social capital. Arguably, the ability to access their network’s social capital is what many entrepreneurs undergoing a crowdfunding raise find most challenging [I speak from experience as I am only three days into my company’s official raise period at of the time of this writing. Numerous emails and phone calls are being made as I work to see my progress bar slowly inch toward my fundraising goal.] Thankfully, Profounder provides some valuable tools and suggestions to assist this stage. So far, the raises that have been successful are those who’ve invested the time into investor communication. This blog post on Cubic Motors summarizes an effective investor communication strategy. This graph illustrates their process:

Even more interesting, social capital as a fuel for crowdfunding has a unique property. While most fuels are used up and exhausted as they are converted to energy, social capital can act as both an enabler and as a product of successful crowdfunding. As the entrepreneur leverages his or her relationship network to build a business that generates a return for investors, additional social capital is created that can then be leveraged at a later point. That is what you call positive net energy!