Study the Candidates before Investing in a Crowdfund

If you decide that you want to put a small portion of your investment portfolio into one or several small businesses and start-ups, a number of crowdfund investing platforms (websites) are available to help you make the best decisions possible.

To pave the way for a possible positive outcome, you have to do your homework. Nothing replaces a thorough review of all information available on the investment in question. One of the biggest benefits of crowdfund investing is that lots of individuals are doing the same research at the same time, and you can use online forums to discuss tactics and information. That said, collaborative efforts should never take the place of your own primary research so that you fully understand what you're investing in and what the risks are. The following sections explain what steps to take as you study the companies attempting to raise capital via crowdfund investing.

Take a lesson from angel investors and venture capitalists (professional or experienced investors in start-up businesses) and invest small amounts in a number of companies. If you were to invest in ten companies, for example, you could assume that, over time, some of them would lose money, some would break even, and a few would make money. If you were lucky, one might generate a very positive outcome.

Know how your money will be used

A company wants to grow, so it runs a campaign to raise the necessary capital via crowdfund investing. What exactly will it do with the money being raised? The question is obvious, but you have to make sure you get a concrete answer.

Look at the campaign proposal and how much the company wants to raise. Carefully review its plans for using the funding. Ask yourself these questions:

  • Do you think the amount of money being raised is enough to enact the company's plans, or is the company asking for too much? For example, say the business plan is to start a cable television channel and the company is attempting to raise $200,000. If the plan states that the company can be operational with that money alone, that's a red flag. The legal bill alone for working with cable companies and the Federal Communications Commission (FCC) is likely to cost more than $200,000.On the flip side, if a business plan suggests that it will cost $200,000 to start a small landscaping business, you should find out a great deal more information before deciding to invest because that number seems high. (Maybe it isn't, but you need to study the plan to find out.)

  • Do the company's assumptions and timelines feel credible? Does the plan suggest that the company can open a restaurant in three weeks? On the other hand, does it suggest that three years of research are required before the company can decide on a restaurant location? Both timelines seem unreasonable and should raise red flags.

  • Has this company used investor money wisely in the past? If this isn't the first time this company has raised money from debt or equity, ask questions about its financial history. If the business has used debt in the past, did it repay the debt on time? If the company offered equity in the past, does it still have good relationships with those earlier investors, and did the company use the money to grow?

If you can't glean these answers from the information the company itself has provided, use the online crowdfund investing forums to ask very specific questions. If you don't get satisfactory answers from the company in a timely manner, don't invest.

Read online opinions and questions about a proposal

All pitches on crowdfund investing websites (called funding portals) offer potential investors the ability to post questions and read comments and answers from other potential and current investors and company representatives. Keep a few things in mind when you enter these conversations:

  • Perform due diligence before asking. These are small companies working under intense time constraints. Review what has already been asked and answered. That way, if your question has already been answered, you save time for yourself, as well as for the business owner or representative.

  • Be a constructive part of the dialogue. Posting random or unrelated comments or making inflammatory statements is not appropriate. Be respectful of everyone in the conversation.

  • Leverage other investors’ experience. Let others in the online community help you build your investment skills. Try to find a few trusted individuals you can chat with online about the merits and weaknesses of investments you're considering.

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