- Ensure that you’ve conducted sufficient due diligence.
- Scour through the details of the terms of your investment.
- Don’t invest unless you have spare cash that you can set aside for long-term.
- Diversity is key, invest in multiple industries instead of only one.
- Choose your investing platform wisely.
It may seem like investing has become a lot easier, with the advent of crowdfund investing platforms. Retail investors are now empowered to delve into venture capital and angel investment territory.
Don’t be fooled by the catchy headlines and descriptions! These platforms are merely providing access and the tools for potential investors to conduct their own groundwork. Before you begin putting money on these platforms, here are a few things that you should look out for to ensure that you maximise your gains.
Don’t skimp on due diligence
While there may be some form of preliminary checks conducted by these platforms, you should also conduct your own due diligence. Some of the important things to look at before deciding to invest include:
- Conduct research into the company’s track record (if any)
- How many founders are there and what are their backgrounds (industry experience, successes, failures, etc.)
- What is the company valuation and how many rounds of funding have they been through?
- How big is the team and are there any gaps in terms of capabilities?
- How competitive is the company’s industry?
- Make a list of similar companies that have exited to have a rough gauge of your potential returns
Understanding the psyche and motivations of the company’s founders is of utmost importance when conducting due diligence. Multiple co-founders tend to work better than a single founder. Studies have shown startups with 3 co-founders grow 3.5 times faster than startups with one founder. Make sure the teams’ skillset present a good balance of technical expertise and business acumen. Despite outliers like Jobs, Zuckerberg and Gates, try to look for founders with college education as studies have shown that they are less likely to fail.
Don’t miss out the details
Unlike your traditional investment vehicles where a manging partner oversees the term sheets and contract details, crowdfunding platforms is rather limited in terms of regulation. Make sure every detail pertaining to the terms of your investment is covered or risk costly lawsuits. Here are some key questions that you should be asking when looking at the investment terms:
- What is the company’s valuation pre-money and post-money?
- Will future rounds of financing dilute your shares?
- Will there be any negotiation to protect your investment, and who will be in charge of these negotiations?
- Will you have any voting rights?
- Will you be issued common or preferred stock?
Don’t invest unless you have spare cash that you can set aside for long-term
Crowdfunding investments tend to be illiquid, so expect your investment to be locked away for a long time. Unless you have excess funds that you can set aside for at least five years, it would not be wise to invest in crowdfunding platforms. To give you a rough idea of how long your money will be held for, here are a couple of potential exits that you can expect:
- IPO or acquisition
Depending on how far the company is in terms of its business journey, IPOs or acquisitions can take up to 5 years (usually more). With new avenues to attain funding being created, we can expect this expected timeframe to extend even longer.
- Sale on secondary market
In most cases, you would be required to have held the shares for a minimum of 1 year before you can sell it off on a secondary market. Even so, secondary markets for startup private equity isn’t very vibrant and it would be difficult to find a buyer.
Don’t put all your eggs in one basket
Do not make crowdfunding a big part of your portfolio. The best option is to limit your investments on crowdfunding platforms to 5% or 10%, depending on your net worth or annual income. Even within that 5% to 10%, make sure that you’ve got a good variety of companies. While you may be tempted to go full force into fintech investments since it is the hottest industry right now, it is important to diversify and cover multiple industries should market sentiments shift and change.
Don’t forget to choose your platform wisely
Crowdfunding platforms that merely list investment opportunities should be avoided. You should be seeking platforms that take on the broker/dealer role, sieving through the long lists of applicants, and picking out the best for their users. Curated investment opportunities mean that the platform has already conducted a preliminary round of checks. Be sure to look into the team behind the platform and understand how they conduct their due diligence. Are they doing enough to protect your investment? A good portal should have policies that will indemnify investors as well as have insurance liabilities put in place. Last but not least, make sure you understand the charges that come with the platform, which could cover multiple services like due diligence, compliance and disclosure.
Make sure that you’ve done your homework before investing. Once you’ve taken the plunge, there isn’t much that you can do to influence the growth of your investment. Unlike trading stocks, the work doesn’t come during the course of the investment, but before. Play your cards right and who knows, you could be looking at investing in the next Facebook or Alibaba!