Hi!

With 2.05 billion monthly Facebook active users and 357 million active blog users on Twitter, social media has become an important conduit of information for individuals, firms and markets. Is indisputable that social media provides an alternative channel for marketing communication, enabling firm to build their brands and interact with customers.

What about the use of social media in the capital markets for early-stage firms?

While seed stage companies are more focused on product development, early-stage firms are typically seeking capital to invest in product development, building a team of employees, and formalizing customer acquisition strategies.

Early stage companies face two distinct information challenges when they search for investors, interestingly both of which social media can address.

First, here we can use a metaphor. Early-stage firms are off the radar, due to the lack of strategic relationship with investors. This could happen both for the geographical area in which business is running (far from renowned innovation districts) or for lack of connections and experience about investors’ engagement. This implies that investors need to engage in costly research to identify and keep in touch with potential startups to finance far from their habitual network.

Second, early-stage firms lack hard information such as assets, cash flow, and others traditional metrics used by investors to evaluate firm quality and perspective capacity of growth.

All these information barriers are exacerbated by a principal-agent conflict: entrepreneurs have the incentive to exagerate growth and earnings to attract funds, or at least is what an investor feel when he faces an investments opportunity on which is not completed informed. Normally all these barriers are partially attenuated by geographic agglomeration of investors and startups, by innovation and financing districts, where starts up are observed, and information about investments opportunities are shared among investors.

With the technological development, social media are becoming gradually an additional source of information, impartial from investors’ network because these social engine systems do not rely on geography. On contrary, they were imagined to reduce geographical distance.

Surprisingly, more than Facebook, Twitter appears to act as a multiplier of legitimation and visibility for startups who are searching for strategic investor partner. A recent research from Harvard Business School, analyzing the mechanism through which social media can influence startup funding, has demonstrated that a proper communication on Twitter by early-stage companies allow achieving funds.  

In particular, an intense social media activity could reduce costs and efforts to attract investors, not only VC but also a business angel. Since Angels are usually not full-time investors, they normally have less channel about investment compared to VCs. Social media play a large role in their discovery of potential companies in which invest.

Social media are globally diffused; this means that the type of investment is diversified more than traditional methods. Normally, based on their network, investors used to allocate capital in a specific sector. The global interconnection offered by social, configure a low-cost channel to diversify investments across a range of industries.

Twitter helps a startup to go out through their geographical comfort zone. Startups engaged in effective social media activities experiencing a greater increase in their financing round size, even if located in regions where is harder for investors detect a new business.

Finally, Twitter and activity on social media gives investors more information – hard and soft – to evaluate the quality of the proposed business and the team competencies.

This means that an intense activity on Twitter could make capital allocation more efficient and well distributed. This possibility is more realistic in a market such as the USA, where the JOB Act has allowed in the 2015 startup to tweet about the opportunity to invest in them. Something they were previously prohibited from doing on most public platforms.

Have an intense activity on Twitter does not mean share without a strategy, the capacity to attract investors and gain visibility is strictly related to the startup communications level. Mentions, a high number of follower and interactions, re-tweet and a stable presence in a professional and qualified network are the main features to reach more visibility.