💸 Would You Buy $100 For $80?
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"Would you buy $100 for $80?"
I thought this was a slam dunk 🏀. Who doesn't want free money?
I posed this exact question on LinkedIn a fortnight ago, and… I was wrong. Very wrong.
It looks like you can't even give money away nowadays. As some would say, a discount by itself isn't enough for most people.
The 171 people who responded to the offer were (unsurprisingly) overwhelmingly Australian professionals, many from the finance or listed space.
The majority did not take me up on the offer.
And while this isn't the biggest sample size, it's larger than most placements, so let's use it as a proxy for discussion.
The results:
6% of people said "no thanks"; it sounded too good to be true, and that scared off people.
25% of people took the deal; free money is free.
69% of people wanted to ask a question first; I want to dive in here.
Too good to be true: the research
I searched for why this was and came across an interesting research paper that highlights what they call 'suspicion-based rejections’.
No need to acquire it; here's the relevant abstract we can use.
“It is a common belief that high offers are more readily accepted than low offers. In contrast to this general notion, the current set of studies shows that there is a limit to the beneficial effects of making high offers and that becoming too generous may backfire.
This paradoxical finding is observed when offers are made in an ambiguous situation of asymmetric information. In three studies, we found that when bargaining opponents had private information over the total amount that was to be distributed, participants became suspicious about high offers (i.e., offers that were beneficial to themselves), but not about low or equal offers.
Due to suspicion, participants rejected high offers more often than equal offers.”
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Information asymmetry in capital raising
Interesting… so let's return to our LinkedIn poll. There was definitely the view for respondents that I knew something they didn't.
We didn't share the same level of information, or the perception was we didn't - hence why most people wanted to ask a question first. They wanted to even out the asymmetry of the information.
Capital raises are the same. No one is more knowledgeable about the company than the directors and management. You may be raising at a discount to an already deflated price and wondering, "why isn't it getting taken up?".
But - there is an asymmetry of information - so the investors you're pitching can become wary when the deal looks too good to be true.
And don't most placements look too good?
For example, yesterday's stock price was 10 cents, but today it's 8.5 cents + 1:2 15 cents options. That's a very good deal by most standards. Good enough to be suspicious.
Let's reframe my original poll as if I'm raising capital.
Invest in my company at a 20% discount ($100 for $80).
By offering the deal, I've secured 43 investors (25%) and raised some cash. But these people don't seem interested in the company… no questions to ask?
Are they going to be long-term? Are they supportive? Do they even know who I am? Or is it the free money?
Then there are those 118 investors (69%) who are a 'no' (for now) but have a question to ask.
These seem like people I can bring along on the journey. People who (if they invest) will potentially do it for better reasons than free money. How do I make sure I bring those people along?
This further supports my view that we all want to maintain our optionality. We want the option to ask a question. We want the option to ask the question that is important to us.
So - the key takeaways are:
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