That intangible of growing support with friends and family, especially as companies make it easier than ever for those with retirement savings to diversify their portfolio by using their Solo 401(k) or Self-Directed IRA, to invest in startups. While all can agree that diversification is good thing, the idea of investing retirement savings into a startup invites a little more consideration than taking capital from a money market fund and investing in a startup. Bank loan specialists, not surprisingly, focus intently on the entrepreneur’s reputation and past history with their bank and others before extending a loan.
Then there’s Kickstarter and Indiegogo. This spring, a new study from of Binghamton University, State University of New York, drove home that point about the importance of reputation when it comes to securing the necessary capital at these popular crowdfunding sites. Kickstarter and Indiegogo give people a platform to display their ideas for products or services they’d like to create, giving virtually anyone the opportunity to fund the project. Investors may sometimes give money with the promise that they’ll get the product in return once it’s fully funded and completed.
Unlike other e-commerce platforms such as eBay and Amazon, most crowdfunding websites don’t have a traditional product and seller rating system, meaning funders often enter the process with a sense of uncertainty, according to the paper. “Crowdfunding is interesting because you’re literally buying something that isn’t finished from a person who has never made it before. There are no product reviews, and there are no seller reviews,” said Ali Alper Yayla, associate professor in Binghamton University’s School of Management.
They also found that no matter how complex the promised product was, potential funders were more concerned with a seller’s reputation and opportunism than the seller’s competence and expertise to make the product they’re promising.
“We found that people worry more about the seller’s honesty than whether the seller actually has the ability and knowledge to finish and deliver on the product,” said Yayla. “People don’t want sellers to just take their money and run.”
As a product gets more complex, their research also found that concern for the seller’s reputation increases, while concerns over the seller’s ability to create the product then decreases.
“This was an unexpected finding,” said Yayla. “You’d assume that people would think if the product is very complex, the seller may not actually have the ability to make it. On the other hand, you’d think that people wouldn’t worry about seller competence in low-complexity products.”
Yayla said one possibility for why this happens is that investors in high-complexity products may already be familiar with the science behind that product, and that unfamiliar investors probably wouldn’t consider looking into the product in the first place.
The researchers went on to offer some advice to those seeking investment: Be willing to provide plenty of detail about yourself to their potential funders. Further, consider providing links to social media pages or other sites that feature ongoing projects to help bolster your reputation.
At the same time, make sure there is nothing on other social media pages that could damage your reputation.
The bottom line is if you appreciate the value of your reputation and nurture that reputation, then investors, lenders or friends and family will all have one more reason to provide capital to your business, whether they do so through a crowdfunding campaign, bank, or by unlocking their retirement savings in their Solo 401(k) or Self-Directed IRA to make strategic investment.