The Effect of FOMO on Investors

VC “FOMO” or Fear Of Missing Out was a term widely circulated at the Startup Grind Europe Conference last week, not least in relation to how it can affect the whole investor community.

Although investors inform themselves on all the companies they back, the private equity sector can still feel like a game of darts with the lights turned off – you never know if your next move is going to be a hit or miss.

As risk-averse beings, it is often that we regret the chances we didn’t take, which is where the FOMO effect comes into operation. After all, the fear of missing out on the next billion-dollar idea is not strange to investors. What is new, however, is the ability of start-ups to capitalise on that feeling and engage in marketing and strategic techniques to enthuse investors who want a piece of the pie.

The purpose of FOMO is to create hype and a sense of urgency around fund-raises. Common tactics include sending out unsolicited forms for investors to complete if they wish to qualify for a slice of the equity or even infiltrating investor groups to offer intel on hot deals.

Another way to put pressure on investors is to create short, strict timeframes for raising rounds. This automatically indicates a “hot deal”, putting a pressure on investors to make a decision NOW or risk losing out on potential awards.

Start-ups operating with SaaS delivery models are in an even better position to generate FOMO. Their self-sustainable modus operandi does not require a lot of capital – this allows them to be picky in regard to their investors. Knowing you may not make the cut into an exclusive deal again prompts that mindset of ‘acting quick or missing out’.

Start-ups can benefit from FOMO a great deal. Less pitching time, quicker raising rounds, free word of mouth marketing and heaps of eager investors lined up at the door.

Yet on the other end of the table, FOMO may trigger poor investment decisions. To investors, more time equals more data about the company, as well as an opportunity to follow and observe their activity in real-time. Depriving VCs and angels of this time means increasing the risk they expose themselves to.

While this marketing gimmick may accelerate the overall journey of a company and generate an earlier exit than initially predicted, one must remain analytical and do background research.

Alternatively, angels may opt for platforms that carry out their own due diligence and present their networks with verified opportunities.

The key learn from an investor perspective though, is don’t be rushed into anything and make sure you are entirely comfortable with your investment choices before committing to an opportunity.

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