You’ve been looking for a smart investment and you’ve been thinking about putting some of your available capital into a crowdfunding pitch. You’ve explored our directory of crowdfunding services and found a few interesting pitches, but what should you look for when you make an investment?
That’s what we hope to explain a little in this post, but in light of FCA rules (and common sense) we should warn you that: “The materials on this site do not constitute financial or other professional advice. We make no representations as to the accuracy, completeness, suitability or validity of any information and will not be liable for any damages arising from its use.”
What we can do is share a few insights we hope might help you make good investment decisions of your own.
Know the market
You should know the market you’re getting into and once you choose to make an investment using a crowdfunding service you are already in the crowdfunding market.
If you are making an investment you’ll want to place your bets on people who know what they are doing — and that includes them knowing about crowdfunding, if they’re pitching via a service. So what should you look for?
Check the pitch
Video is pervasive, and most crowdfunding services offer people pitching the chance to publish one. Video creation isn’t for everyone, of course, and while there are people around who’ll make a video for your crowdfunding pitch, as an investor you’re probably not looking for production values as much as you seek passion, intelligence, and honesty.
People making pitches really should make videos when they do. Campaigns that do make videos achieve a significantly higher success rate than those who don’t, and they raise up to 122 percent more money, too. If the pitch you are pondering doesn’t offer a video when they are trying to raise money, does it make sense to take a position in them at all?
On the other hand, if there is a video are they doing it right?
There’s plenty of advice websites out there who recommend people making videos for this purpose keep the film short, to the point, say who they are, show themselves and manage to get the point across while still trying to have a little fun. As an investor your first test of potential business acumen starts right there — are your potential investees thinking about the importance of this video to what they are trying to do?
Are they working to create an emotional bond with you inside the first minute?
The same logic should extend across your analysis of the pitch. Find out what the current advice is for people seeking funding through crowdfunding and compare this with what you’re seeing — there’s a very good chance the people you are looking at have read the same advice too. Unless you are seeing something incredibly genuine and charmingly individualized, then you should expect your potential investments to at least try to heed that advice.
Crowdfunding means crowd
Campaigns that gain 30 percent or more of their funding goal in the first week are the most likely to succeed. Knowing this you usually find people making pitches have already mobilized their friends and relatives to help raise them to that point in funding. This means that when you’re thinking on taking investment in a pitch, one thing you can look for is how long the pitch has been available and what percentage of funding it has achieved.
Existing networks are never enough. If they were, people making pitches wouldn’t need to pitch at all. In most cases the project you’re considering will have exhausted its personal connections to get to the funding level it has already achieved. A smart investor will take a look at what the people behind the business are doing to fill the gap. The most usual strategies pitching people make is to be digitally active, so an investor may want to check if the team:
- Is active online?
- Has a website?
- Which services are they active on?
- Can you find guest posts or blogs on other websites written by the protagonists?
Checks like these can help investors determine just how much the people who want your money are doing to find additional investment. It’s not foolproof — some pitches and business ideas are extraordinarily niche, so you can’t really expect exactly the same behaviour, but on a case-by-case basis it makes sense to vet pitch-related digital marketing efforts.
While making these checks you may find further evidence to suggest how active the people behind your potential investment are online. It makes sense for them to be — it’s about reaching the crowd to bring in the finance; so if they aren’t especially active at this stage of their business, how active do you expect them to be with your money once the business goes live?
You should also you follow the age-old principles of due diligence, for example:
- If your potential investment claims to be a trading company you should certainly check its details on Companies House (or your local equivalent).
- You should then assess any available data regarding the directors of the company.
- You may want to run credit checks against the company and its people.
- Contact your potential investment and ask to see their company information and business plan.
Ask difficult questions:
“Who are your competitors?”, “Where do you want to be in 20-years time?”, “What kind of company are you?”, “How reliant are you on foreign manufacturers and do you have an existing relationship?”, “Where are you with distribution?” You don’t have to run at any of the answers you receive, but you have to be certain the target of your investment has at least some knowledge of what they are doing. It is possible that you may already be able to fill in any gaps in the knowledge/reach of your investment target or its team.
Finally you’ll need to call in the lawyers, agree a suitable contract and (presumably) run a Criminal Records Check.
All these tests of due diligence are traditional, but each one is essential. Merely because the business you are investing in sources its funding online doesn’t mean your money should be less well protected.
Stay hungry, stay foolish
I’ll end these few snippets of advice for potential investors with one warning: The difficulty of judging business ideas by how well their protagonists do their crowdfunding marketing is that in some cases you can miss a great idea simply because such marketing isn’t what they do well. As Apple’s Steve Jobs’ once said, “Stay hungry, stay foolish,” and keep your eyes open for that maverick pitch that could become worth it’s weight in gold.
Also read: The ABC of crowdfunding