Role of Social Media In Start-Up Funding

In the past couple of decades, social media has literally dominated the world of business. It has touched almost every single aspect of business. The funding of start-up companies by venture capitalists as well as angel investors is no exception. Several studies have been conducted to ascertain the impact of social media presence on the funding decision made by investors. There is a clear correlation between social media presence and the ability to attract organized capital.

In this article, we will have a closer look at how social media platforms can be used in order to attract more funding for start-up companies.

1. More Likely to be Noticed by Investors: In the old business model, investors were not aware of the presence of potential investment targets. They have to pay a huge finder’s fee to an agency so that they were able to access and evaluate potential targets. This was an expensive mechanism for the founders as well as the investors. However, social media has changed the game.

   Nowadays, investors who are interested in a certain industry tend to spend their time surfing social media to obtain information about the start-ups in that domain. Social media erases geographical differences and allows investors to evaluate businesses that are located far away from them.

   Also, many companies have now started using social media platforms such as Twitter in order to raise funds for their business. This new practice means that if a firm has a sizeable and attractive social media presence, it is more likely to be noticed by investors. Hence, there is a clear correlation between the social media presence of a company as well as the ability to raise funds.

2. Provides Investors with More Information: Another problem faced by investors is that they do not have access to correct information about the start-up company. The cash flow statements, records of assets, and other details which are provided to the investor may be inaccurate. This is more likely since the founders have an implicit incentive to exaggerate these numbers. The more successful a start-up company can project itself to be, the higher valuation it is likely to receive.

   Investors can use social media to validate some of these claims made by business owners. For instance, there should be some amount of correlation between the number of customers that a business claims it has and the number of social media followers. This information is valuable to investors trying to evaluate a potential target. Hence, if a company does not have a social media presence, the investors are not very confident of the numbers claimed by the company and hence make decisions accordingly.

3. Due Diligence on Social Media: It is common for investors to conduct full-fledged due diligence on social media. Investors tend to compare the social media presence of a target company with its competitors. This helps them understand the brand presence of the target. This also helps them understand whether or not the start-up business has a hold over a market niche.

   If the start-up is able to engage with the market niche, it is a clear indication that their offering has some value to the same segment of customers. It is common for investors to conduct a competitive scan of the social media pages of a target start-up company.

4. Detailed Statistics: Most social media platforms record the various interactions between the brand and the audience. Every social media network has tools in place that can help the start-up company understand its target market better. The age groups, location, language preferences, and other details of the target customers can be obtained by paying a fee to social media networks. These reports are often used by investors to gauge the success of the marketing efforts of the start-up firm.

5. More Presence Does Not Mean Better: At every point in the article, we have mentioned that a social media presence can help a start-up company obtain funds. However, it needs to be realized that the social media presence has to be optimum.

   An excessive social media presence can actually be a deterrent to the funding process. Excessive posting on social media is considered to be spamming and it has a negative impact on both customers as well as investors. Instead, the start-up company should have a clear brand positioning and image which they augment by meaningfully engaging their audience using social media platforms.

The bottom line is that social media marketing is not only targeted at customers and end-users. Over the years, start-up companies have come to realize that their social media presence is carefully evaluated by potential investors. This is the reason that start-up companies tend to allocate a significant amount of budget towards having a sizeable and attractive social media presence.