Crowdfund Investing: Evaluate the Financial Information
If the people running a crowdfund investment campaign are organized, you should be able to easily find information that can help you anticipate what to expect from your investment. But seeking out that information is your job — unlike with traditional investments, there’s no broker or middle man to do the legwork for you.
The financial information connected to the investment campaign is one of the most important elements for you to review and understand. That’s because no matter how sound the idea for the business is, if the financials don’t make sense, you’re never going to see a return on your investment.
The financials should include clear explanations that walk you through what you’re seeing. If that’s not the case, don’t get embarrassed and assume you should just trust that everything’s fine. That’s how people lose money! Instead, reach out to someone with an accounting or other financial background (surely there’s an accountant somewhere in your family) and ask for help analyzing the data.
If you’re looking at a campaign for an existing business, it should provide a good history of past performance. Consider whether its future goals mesh with that past performance; if a big leap is planned and the owner hasn’t explained how the leap is going to occur, be very wary. For example, say the company is a $100,000-revenue, bricks-and-mortar store, and it wants to raise $50,000 for a new location. If the owner is saying that the combined revenue is going to be $500,000, send up a big red flag. Make sure you can locate a good explanation for every assumption the entrepreneur has made.
When you make investments in the public stock markets, you can review quarterly and annual reports to see a company’s revenues, expenses, profits, and losses, as well as the typical ratios that investors review prior to making investment decisions. But companies seeking crowdfund investments will likely be newly formed or very young and may be creating externally visible financial reports for the first time. This fact doesn’t mean that you should expect any less accuracy or completeness from them, however.
To promote transparency of financial information, the SEC requires companies using crowdfund investments to supply certain information to potential investors. Take full advantage of any financial information supplied by the company during your decision-making process, and if you don’t see the kind of detail that allows you to make a decision you feel confident in, walk away.