Survey findings, part 2: Investor concerns
As a result of our survey on investor behaviour, three distinct groups of ordinary investors emerged (see post Survey findings, part 1: A different take on small investor interests). Group 1- individuals who would not invest in SMEs or startups (56.5%), group 2 – individuals with an interest to invest (35%), and group 3 – individuals who are ready to invest, based on interest, risk profile and willingness to invest time (8.5%).
We will be analyzing investors’ concerns along these groups. With respect to group 1, we will try and establish key reasons that are keeping people from considering this type of investment (besides other aspects like for instance lack of interest). Regarding group 3 (people who are likely to invest), we will try to find out where they would lay emphasis on in the due diligence phase – given an appropriate SME or startup could be identified. And as for group 2, we will try to assess to what degree and under which circumstances these people would become likely investors in the future.
The chart below gives an overview of concerns along with a rating (strongly disagree to fully agree) for each group. The three groups consistently express different levels of concern throughout all questions. Each group corresponds to a distinct concern profile which we will enlarge upon.
People not considering an SME or startup investment (group 1) share all concerns listed, the top three being:
- “Due to a lack of own experience, I do not feel comfortable with such an investment”
- “I would be concerned that the information I have available when deciding on the investment are not comprehensive or not entirely correct”
- “I would generally be afraid to loose money with such an investment and stick to traditional investments”
This expresses a general fear or hesitation, relating to a lack of experience or a fundamental mistrust in such kind of investment. Based on these fundamental barriers, a more in-depth discussion of more specific concerns would bear no additional insights.
For those ready to invest (group 3), only two concerns are seen to be of some importance:
- “As I do not know the owners or the management of the company, I am afraid that they may not be up to their management task”
- “I would be concerned that I would not be kept informed regularly”
Individuals from this group do not share any of the other potential concerns (a value of zero indicating a neutral attitude, this group rates concerns not mentioned above below zero). This of course does not imply that these people deem the majority of concerns as illegitimate, but rather as resolvable. Clear disagreement is expressed, if we are insinuating a lack of experience or fear with respect to such kind of investments. Their concerns are specific to a given opportunity, circling around trust in the management team and post-deal reporting.
Let’s take a closer look at group 3. Strikingly enough, the so-called exit option, the way in which a private equity investment can be liquidated, is not overly high on the agenda of small investors. This finding is particularly interesting, as it is well known to be an important factor for business angels and institutional players, when placing their investments. Typically, the latter are seeking an exit in 3-8 years in order to free up resources – in the case of institutionals also pressed by their own investors, and generally are mostly motivated by purely economic factors. It appears that in this regard, the small investor distinguishes itself through increased patience and potentially different/additional investment motivations – an assumption we will be validating in a subsequent post on the survey results. It is important to note, however, that many small investors are simply not familiar with various aspects of such an investment; this most certainly includes the divestment mechanics.
Also noteworthy is the fact that likely SME and startup investors state, they would not be frustrated if an investment turned out to be unsuccessful. Taking into account the potential high risk associated with an SME or startup investment this is another confirmation of their entrepreneurial mindset.
To complete the picture, let’s cast some more light on group 2 and assess how high a barrier their concerns pose and under what circumstances they would still adopt this type of investment. The group indicates that they would feel quite comfortable with this type of investment and that they would not be afraid of loosing money. Nevertheless, as opposed (and in addition) to group 3 (people likely to invest), there are a number of concerns shared with group 1 that would have to be addressed: comprehensiveness and correctness of information, potential liquidation difficulties, coordination with other small investors and fraud risks.
In summing up, we are seeing quite fundamental concerns for group 1, making it quite clear that they would only take the plunge in exceptional cases. Group 2 feels generally comfortable with such an investment. Before they would invest in an SME or startup, however, probably most of them would want to get more clarity around what such an investment entails. Group 3 clearly has the mindset of the entrepreneur and SME / startup investor.
Survey: N=176, including only participants from Germany, Switzerland and Austria in evaluations