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Weigh the Risks and Potential Rewards of Crowdfund Investing

On average, 50 percent of investments in early-stage companies fail. So, the risks of crowdfund investment seem pretty clear: You can lose some or all of your money.

Among the failures, 50 percent of early-stage companies run out of cash before they can succeed. The other 50 percent of failures suffer from poor management decisions, poor hiring decisions, poor use of funds, and so on. Therefore, as a potential crowdfund investor, you have to make the effort to figure out a couple key things about the business you’re considering:

  • If its campaign is successful, will it have enough cash to meet its stated milestones?

  • Have the owners and managers thought through crucial decisions such as who to hire and how to use the money being raised?

Luckily, you don’t have to be a super sleuth to find answers. The business or entrepreneur seeking funds is required to provide a lot of information in its campaign pitch. Your job is to read (and watch and listen to) all that information and to participate in online crowd conversations when you find certain answers to be lacking.

You can’t be a passive investor; you must commit to taking an active role in finding out as much information as possible.

Becoming an active investor can be a reward unto itself; doing so offers you a sense of participation and control that more traditional investments can’t provide. It also teaches you how to be savvy in all your investment decisions.

In addition, of course, you hope to make investment choices that may pan out in the long run with rewards you can’t get anywhere else. If you’re able to identify even one company whose idea is brilliant, whose business model is flawless, and whose management is rock solid, you just may find yourself in a position to reap serious financial benefits down the line.

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