Scientists pinpoint amount to ask for to find crowdfunding success

By Stephen Beech

The “sweet spot” for crowdfunding success has been identified.

Setting a £90,000 target drives investors to put their money behind business start-ups, according to a new study.

Researchers analyzed more than 1,000 successful crowdfunding campaigns on the platform Seedrs.

They found that setting a £90,000 “sweet spot” target, having around 19 team members, and using certain phrases, including “health” and “organic” in campaign pitches all helped attract investors.

Offering a high equity percentage in return for investment was also found to be "crucial" – with low equity ratios putting investors off.

The researchers hope their work could help entrepreneurs fine-tune their campaigns by choosing the right financial targets, crafting compelling language, and building strong teams.

The study, led by University of East Anglia (UEA) researchers and also involving the University of Manchester, was published in the journal Bulletin of Economic Research.

Co-author Professor Peter Moffatt, of UEA, said: “We were attempting to identify the features of a campaign that attract investors.

“We find that the optimal target amount, the sweet spot, for entrepreneurs to raise is around £90,000.

More from this section

+3

Scientists pinpoint amount to ask for to find crowdfunding success

+4

Research reveals ants use ‘chemical warfare’ to kill their queens

+4

Narwhals caught on camera colliding with deep ocean monitors

"It seems that investors are happy to contribute to projects with targets up to £90,000, but consider targets above that to be too high.”

The research team used data from 1,189 equity crowdfunding campaigns, collecting information on the target amount, the amount raised, the percentage of equity offered, the number of team members, and the presence of particular words in the one-paragraph project pitch.

They then identified the features of a campaign that bring about an increase in funds raised.

The researchers found those pitches containing the words “health/healthy” and “organic” tend to be more successful, while those containing the words “entertainment” and “information” appear to be less successful.

Regarding the optimal number of team members, the researchers suggest that starting a business with a small team can be "difficult and cumbersome" because of the lack of competence and capacity constraints.

But the larger the management team of the start-up becomes, the more likely it is that disputes among its members will happen.

Moffatt said: “The percentage of equity offered is also a really good measure of the extent to which the entrepreneur is relying on the external investors.

"Our result of a high equity percentage contradicts findings from previous studies, which have found a negative effect related to this."

He added: “We suggest that if the percentage of equity offered is very low, this might be perceived as a signal that external investors are not regarded as important to the success of the project, and this might put investors off.

“Investors want to feel that they are making an important contribution.

"Another possibility is that a low equity ratio signals that the company’s valuation is exaggerated, and this might make investors wary.”