Potential Problems with Crowdfund Investing

One of the big differences between crowdfund investing and regular stock investing is that if you’re part of a crowd, you have actual contact with the business owner. If a crowdfund investment campaign is successful and the owner receives the full funding, he likely will set up a forum for communication with investors.

(Crowdfund investing works on an all-or-nothing basis; if the campaign doesn’t garner full support for the stated financial goal, the business receives nothing.)

If you choose to be part of a company’s crowd, take part in whatever communication forum it creates and follow the rules that the business owner sets up with regard to how you communicate with the business. Even if you don’t take part in the discussion, be sure to monitor the forum to stay abreast of the company’s progress and keep your eyes open for any potential problems that may arise.

Request communication when things get too quiet

During the crowdfund investment pitch, an entrepreneur should tell her supporters how often she plans to relay information to them. If the entrepreneur goes radio silent for a longer period of time, you can interpret the quiet as a good or bad thing. The silence could mean that the company is very busy making you money.

However, it could also mean that problems have emerged. Communication is extremely important in a business investment relationship.

As an investor, you want the entrepreneur spending 98 percent of her time building the business to give you a return. You don’t want to overburden the entrepreneur with constant questions about how things are going. However, a certain amount of communication from the entrepreneur is absolutely required.

If more than 90 days go by with no communication, you should post a question on the company’s online crowdfund investing forum to ask what’s going on. Doing so reminds the entrepreneur to update her investors. It also holds her accountable and reminds her that she isn’t the only owner of her company anymore.

If you post a question online and don’t receive a response within a few days, send a follow-up e-mail to the entrepreneur. Let her know that you posted a question on the forum, and tell her the day and date of the question. Then repeat the question in the body of the e-mail.

Gauge product or service quality early in the venture

Chances are, if you invest in a company, you know either the entrepreneur or the product or service he’s building. If you’re familiar with the product or service, you may be able to offer valuable insight to the entrepreneur.

Early on in the venture, try to gauge the quality of what’s being created (assuming that the entrepreneur shares adequate information with you regarding the product or service). If you see major red flags, be sure to let the entrepreneur know. Some examples of red flags might be

  • Material that won’t hold up in the heat or the cold when those are conditions that will be regularly experienced

  • Ingredients that can cause dangerous allergic reactions

  • Products that require Food and Drug Administration (FDA) approval, which will take a long time to secure

  • A lack of planning for how to distribute an e-commerce product that’s difficult and expensive to ship

  • A product or service that could run into copyright issues

Keep in mind that the business is the entrepreneur’s baby. He is living, eating, and breathing this business day and night. When you reach out with a critique, try very hard not to be offensive. Let the entrepreneur know why you’re qualified to give your advice.

Also, read through the forums to see if someone else has already brought up your points. Part of your job as an investor is to help the entrepreneur stay focused. If he has ten investors giving him the same advice, he has to spend ten times as much time responding to the posts.

Your ultimate goal in your investment is to make a return on your dollars. Communicate with the business owner in a way that helps him build the best possible product or service that will make you the most amount of money.

Respond to (or ignore) discontented investors

Every member of a crowd isn’t going to be happy with everything the entrepreneur does, and at some point you’re bound to read complaints on the online forum. (Complaints can range from “Why did you go with that color?” to “Einstein’s theory of relativity totally discounts your hypothesis.”)

When you do, consider whether the complaints represent a serious concern or whether they can be easily addressed — or even written off as silly and baseless. If a complaint represents a serious concern, start paying closer attention to the forum discussion and the company’s communication.

If you think the complaints may be easily addressed, consider whether you can help the entrepreneur by offering your own response. (If you can’t do so in an educated way, stand back and let the entrepreneur respond.)

Some people like to complain; doing so makes them feel powerful. Responding to baseless complaints gives them undue credence and can distract the entire group. Gauge comments carefully and respond (or don’t) accordingly.

Offer advice and support when it’s warranted

In a traditional investment situation involving venture capital or private equity, the investors often assign someone to the company to mentor and give advice. In a crowdfund investment situation, every investor has something of value to add to the company. For the investor, the hard part is figuring out what’s truly valuable to the entrepreneur and how to present it in an encouraging way.

For instance, if you run a shipping storefront and the entrepreneur is planning on shipping a lot of products, offering advice on shipping materials would be very helpful.

If you bring knowledge from personal experience that could be useful to the entrepreneur, and if you have the bandwidth in your day to give it, monitor the discussion forums to find the right time and place to offer your advice. Also, note how the entrepreneur responds to advice. Try to shape your golden nuggets in a way that will be welcomed by the entrepreneur and easy for her to implement.

Also, realize that even if you have great knowledge to offer, you don’t always have to give it. If an entrepreneur is dealing with a large crowd (dozens or even hundreds of people), too much advice is a major distraction. Carefully pick the times to offer your wisdom.

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