Social Capital and Crowdfunding: Trusting in the Process

Last week we featured an incredible guest post from Delmonize “Del” Smith, 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. You can read Del’s original post, Social Capital IS the Crowd Funding Fuel.  Due to popular demand, Del has returned with a follow-up post on his research. Enter Del…

I’ve stated that the success of your crowdfunding raise will depend, in part, on your ability to leverage the social capital in your network. However, any serious discussion about the importance of social capital during a crowfunding raise must examine the role of trust in the process.

Trust is the willingness of a party to be vulnerable to the actions of another party based on the expectation that the other will perform a particular action. This specific definition applies particularly to the context of crowdfunding because it recognizes the inherent vulnerabilities for both you and your potential investors. As an entrepreneur seeking capital, you are trusting that the person with whom you have a significant relationship with will invest in your company. Your potential investors are trusting that you will use their money to produce the results you propose. Both evaluations are taking place with limited information and evidence due to the newness of your company.

But not all trust is the same. When you look to leverage your social capital during a crowdfunding raise, you are tapping into two dimensions of trust: an affective trust rooted in emotions and a cognitive trust rooted in rationality. Affective trust occurs when individuals emotionally invest in relationships, resulting in genuine concern for a person’s welfare and a belief in the relationship’s intrinsic virtue. Cognitive trust occurs when individuals make a conscious decision to trust based upon knowledge and evidence of trustworthiness (e.g., everything seems in proper order or the other party appears to possess required capabilities).

So how does all this relate to your crowdfunding raise? Motivation and timing.

Early in your idea phase when you have nothing but an idea scribbled on a napkin, your social capital is based primarily on affective trust. Asking friends and family to invest at this point will yield a positive investment decision only from those who have a deep concern for you personally. – Hey Grandma, would you be willing to invest in my idea?

As you develop your idea into a business plan, embark on initial startup activities, and produce preliminary results, cognitive trust builds with your friends and family based on evidence of your activities and success. At the same time, your social network is changing to include an increasing number of individuals who trust you equally for their concern for you (affective) and knowledge about your company (cognitive). This is the ideal time to initiate a crowdfunding raise! This is when you tell potential investors about you and the story of your company!

As your company grows and progresses through its life cycle, your network will likely shift from one of mainly social interactions to more of an economic basis. As a result, entrepreneurs at this stage will typically look to more traditional forms of financing based on cognitive trust (e.g., bank loans, grants, and venture capital).

Knowing the role that affective and cognitive trust plays in the process of leveraging social capital will allow you to better understand the motivation of your investors and choose the right time to begin your crowdfunding raise. So remember, your friends and family are investing in you because they have a genuine concern for you AND they believe in your company.

I’ve provided a few tips on ways entrepreneurs can build affective and cognitive trust with potential investors.

Building Affective Trust

• Keep in close contact with friends and family. Repeated interactions increase affective trust.

• Confide in others about your fears, challenges, and excitement. Opening up and sharing vulnerable information sends “trusting” signals.

• Relay your personal stories so that people get to know you and not just your company.

Building Cognitive Trust

• Convey the successes your company has had to date (trusting in your past actions).

• Do what you say you are going to do. Follow through on emails, calls, and meetings (trusting in your present actions).

• Share your business plan and strategy readily (trusting in your future actions).