Tactics for Researching a Crowdfund Investment
As a new crowdfund investor, when run across a great pitch video and clear documentation, you may immediately jump to the "Invest!" mindset. You begin, naturally, to look for reaffirming information and data for that investment or person. As you look at all the financials, for example, you may find yourself focusing on all the strong sales numbers and not asking as many questions about the unrealistic marketing plans to get to those sales numbers.
Apply some common-sense tactics to avoid being swept up in your enthusiasm. You need to protect yourself from making bad decisions, and you have the means to do so if you just slow down, employ your gray matter, and take some additional steps.
Make sure you actually understand the business or project
Okay, this step is really fundamental. After watching and reading the pitch materials, answer these questions:
Do you understand exactly what the product or service is? If someone asked you to describe it, could you give a 30- to 60-second description of what the product or service is and how it works?
Can you easily describe what problem this product or service solves for a person or a business? Most purchases are made either to stop current pain or to keep pain/discomfort from happening in the future. (Pain is not always physical pain, of course; it's often emotional or psychological pain.) No matter how cool a product may sound, until it solves a problem for a person or business, it's simply something that you pick up at a store, look at, and put back on the shelf.
Who is the customer for this business? When talking with entrepreneurs, a common answer is "Women will love this product!" or "Every dog owner is our customer." But a start-up business never has the capital to sell to every woman or every dog owner. And even if it did, not everyone in those groups would buy the product.
Make sure the entrepreneur has a very clear picture of the target customer. For example, "My customers are women within 6 miles of my store who work, have children, and want nutritious organic meals delivered to their homes twice a week so they don't have to cook. The age range for our product is women between 30 and 45." That type of answer indicates that the business has a good idea of its customer demographics, as well as what a reasonable geography is for targeting customers.
Ask a simple question: Would you buy it?
Be sure to ask yourself these simple questions:
Would you really buy this product or service?
Would you really use this product or service? (Be honest! Buying is one thing; fitting this item or service into your daily life is quite another.)
Would you really tell your friends about how great this product or service is and that they should buy or use it?
These may seem like obvious questions, but many times in the rush of excitement potential investors don't ask them. Of course, the answers depend on who the customer for this product or service is and whether the product or service actually provides a solution to a problem. (See how you're circling back to the fundamentals here?)
Discuss the opportunity with people you trust
Rushing to buy anything — especially stock in a company — is never a good idea. You don't necessarily want to wait for weeks or months to buy a stock; after all, crowdfund investment campaigns don't last very long (30 to 90 days, generally). However, you should take enough time to talk with trusted friends or colleagues. Ask for feedback from people you know whose investment judgment and knowledge you respect. These people may be able to give you outside validation or ask helpful questions so that you have a second opinion about the quality of the investment and whether it's right for you.
In addition to having one-on-one conversations with people, you may consider starting a crowdfund investing club. Maybe some of your friends are interested in this small-business investing space. If so, you each spend an hour or two of your own time researching companies every week or two weeks or month. Then you meet to discuss and debate whether companies that you like stand up to other members' scrutiny. At the end of the discussion, everyone makes her own individual investment decision. But you've had the opportunity to spend some time with friends and talk about interesting topics, and maybe you leave the meeting with some good input that helps you make better investment decisions.
Read the crowd feedback online
Crowdfund investing is an online activity; the business owner or entrepreneur must use an online funding portal, and he reaches out to potential investors almost entirely online via social media. Therefore, you can find potential investors online discussing the owner, the business model, the product, the financials, and anything else related to this opportunity. And that's a good thing; crowdfund investing as a whole can only benefit from vibrant, active crowds that parse these opportunities and determine which are worthwhile and which aren't.
Is it important to read online feedback about the product and the entrepreneur? Yes! Doing so can certainly move you closer to understanding the strengths and weaknesses of the campaign. Should you believe every single comment as fact? Probably not. Treat the feedback much like you'd treat a restaurant or movie review. After all, these are opinions, and you need to judge for yourself just how closely you think they track to the facts.
Avoid impulse buys
Do not buy stock or invest in crowdfunded debt on impulse. Period. You're not buying an ice cream cone here, or even an exercise system you see on late-night TV. You're making an investment, and you should take it seriously. Making an impulse buy will almost certainly lead to regret.
Keep in mind that buying into a crowdfund investment campaign is not the same as buying into a publicly traded stock, a bond, a mutual fund, or another traditional financial vehicle. These other vehicles are liquid, meaning that markets exist for their trade, and you aren't locked into holding them for any length of time. As a crowdfund investor, however, you're locked into your investment for a minimum of 12 months. And even after that time, you may find it somewhat challenging to find a buyer for your equity or debt. (Secondary markets for these securities will emerge, undoubtedly, but the industry is new enough today that they don't yet exist.) Therefore, you must do your research, talk with trusted friends, and carefully consider what to do. Then — and only then — should you make your decision of whether to invest.