Crowdfund Investing For Dummies
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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? Do you think the company is 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) would likely 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. (Perhaps it’s not, 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.

    Working quickly is very important, but opening a restaurant in three weeks would require cutting so many corners that it would likely result in problems downstream. Conversely, three years of location research sounds like analysis paralysis.

  • 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.

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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