Crowdfund Investing: Know Your Connection to the Entrepreneur or Small Business Owner
The premise of crowdfund investing is that you put your money into ventures run by people you know and trust — or by people who have a secondary connection to you. What does a secondary connection look like? If people you know and trust have a connection with — and faith in — the people running the investment campaign, you have a secondary connection. You're just two degrees away from the entrepreneur or company owner.
Why the desire for such a close connection between business owner and investor? Because it takes a lot more than a good idea to make a business profitable. It takes hard work, determination, and focus. (Not to mention luck!) Lots of people can come up with good ideas, and salesmen can make it sound like these ideas are going to be profitable for investors. When you invest your dollars in people you know, you can make choices based on an individual's ability and tendency to follow through. You need to know enough about this person to understand his work ethic and be familiar with his past business endeavors.
Be cautious about investing in someone you may have met once but know very little about. (Laughing over drinks at a cocktail party doesn't give you the insight you need to figure out this person's business acumen.) And be cautious when friends forward information to you via social media about investment opportunities you should check out. If your friends have some financial sense, then be prepared to consider what they're sharing. But always follow up by finding out as much as possible about the entrepreneur or business owner. Here are some great questions to ask yourself as you do:
Is this person trustworthy?
Is she a hard worker?
Does she have entrepreneurial or other business experience?
Does she generally follow through on what she wants to do?
Would you recommend her for a job to another friend or family member?
You are not evaluating people for friendships here. You're evaluating them for their ability to handle your money wisely. You can like someone a lot and not trust him with your money. Therefore, if the answer to any of these questions is "no," walk away.