Crowdfund Investing For Dummies
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So, you’ve got an idea to start an organic farm in your community to sell vegetables to your local restaurants and spur the farm-to-table movement. What’s next? Don’t go out and start planting! First, find out if this idea is a smart one.

Ask key questions

To determine if you’ve got a solid business idea, you need to understand the market dynamics. Start by asking questions like these:

  • Why is an organic farm better than what’s currently available?

  • Do people in your community care about organic foods?

  • How much do they currently pay for produce, and how price sensitive are they?

  • Can you make a living off of being an organic farmer?

Essentially, you’re asking the who, what, when, where, how, and why of starting a business. You could try to answer these questions yourself, but that won’t do you much good. Instead, you need to conduct research by asking people who could someday be your customers.

For the organic farmer, this means walking in the doors of your local restaurants (your potential customers) and asking the owners, “Do you buy organic produce? Do you have problems with supply? Would you prefer to source it locally? How much do you currently pay for potatoes? Would you buy from a local farmer who’s passionate about farming organically?”

You have to spill the beans (bad pun, sorry) and tell people about your idea. Then — and this is critical — you must listen to their answers! If you hear over and over that they don’t care about what you’re proposing, you should think twice about starting this particular business. You don’t need to build something that no one wants.

On the other hand, you may hear responses like, “I’m fine with my potatoes, but what I’d really like to source locally are tomatoes and cheese.” In this case, you may want to consider altering your plan, expanding your questions, and approaching the next person this way: “Which of the following items are most important to you when it comes to sourcing locally: potatoes, tomatoes, or cheese?”

The who, what, when, where, how, and why of a business idea can be phrased this way:

  • Who is your target market?

  • What is the problem you’re solving?

  • When do you want to start?

  • Where do you want to do it?

  • How are you going to fund it?

  • Why are you the right person to solve the problem?

Study the competitive landscape online

Before you use the Internet to raise capital for your idea, use it to conduct a little competitive analysis. Research similar businesses — such as local organic farms, to continue our example — online. Check out their websites. See what kinds of products (in this case, produce) they offer. Ideally, you want to find pricing information, too, but you may need to call these businesses directly to try to get it.

Also, check out the websites of similar businesses in other regions so you can find out how various entities approach their mission. For our farmer, the goal is to figure out how other farmers grow their vegetables. Do they operate year-round? How many people do they employ? What’s their motto?

Check to see if an appropriate industry organization (an organic farmers association, in this case) exists. If so, see if its website has any useful information on starting a business. Google expressions like “top mistakes organic farmers make.” Keep track of all this information in a computer file, along with links to where you found the information.

Clearly, a wealth of information about every type of business imaginable is available to you on the Internet. This information can clarify your business opportunity and save you from wasting a lot of time and other people’s money later on.

Do the research you need to make sure you understand the market. Later, when potential investors ask you why questions, you’ll have instant answers thanks to this research, which will make you look smart and boost investors’ trust in you.

Socialize your idea

After you do some research on the market opportunity and adjust your plans accordingly, you want to socialize the idea with some of the people you’ll later be asking to become your investors. You want to keep it simple and keep your idea close to home.

Begin with the people closest to you and tell them why you want to start this business. Explain what you learned in your research. Ask them for their thoughts.

Find out whether these people might consider helping to fund your dream if you ran a crowdfund investing campaign. If they seem at all interested, be prepared to explain how they might benefit. Toss out a couple scenarios for crowdfund investments to get their feedback.

(For example, you want to raise $100,000 and you’ll sell 20 percent equity in the business with the goal of selling to a larger regional organic farm in five years. Or you want to raise $100,000 of debt from the crowd, and you’ll pay 8 percent interest on it over five years.)

Pay close attention to how they respond to these possibilities. If someone is really turned off by one investment opportunity and strongly favors another, make a mental note. You want to find out what your best financing options may be, in addition to whether this business idea as a whole has legs.

About This Article

This article is from the book:

About the book authors:

Sherwood Neiss, Jason W. Best, and Zak Cassady-Dorion are the founders of Startup Exemption (developers of the crowdfund investing framework used in the 2012 JOBS Act). They deeply understand the process, rules, disclosures, and risks of capital formation from both the entrepreneur's and the investor's points of view.

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