Equity crowdfunding gives investors the opportunity to back companies early on, providing access previously reserved for venture capitalist firms and angel networks. Early stage companies offer the possibility of high returns, however this can come with high risk. Knowing which companies to back is key.
“It’s fine to celebrate success but it is more important to heed the lessons of failure.” - Bill Gates
The final part in our investor series aims to equip you with the tools to select the best from the crowd. According to the Wall Street Journal, about a third of startups fail to make it to year 3, so how can you ensure you’re backing the two thirds? Ask yourself these questions.
Is there sufficient capital?
For companies, working capital refers to the amount of cash they have at their disposal to execute their goals and pay the bills. Lack of funds is consistently cited as a major cause of business failure.
Companies raising capital on Equitise’s platform must disclose their financial standing in the offer documents, providing investors with a clear understanding of their current capacity to meet obligations.
Furthermore, companies must outline the amount of capital being raised and, crucially, their intentions – how the money will be distributed and what they hope to achieve with it. Investors have the chance to assess whether these goals are feasible, realistic and valuable.
Is management capable?
Along with a sturdy balance sheet, the people behind the company are key drivers of success. Even with abundant capital, knowledge and planning is vital. Included in offer documents is a section where managers will introduce themselves to potential investors. Look for an experienced team with a mix of enthusiasm and know-how.
The management team is often supported by a panel of advisors made up of industry experts and seed investors. The process of assessing a company’s personnel is a crucial part of any investor’s due diligence, allowing them to assess the capability of key players in a business.
Is there a need?
Businesses are started with the best of intentions, but often without an appreciation of the marketplace. The service or product a company offers (or wants to bring to the market) needs to satisfy a need, otherwise customers won’t be interested.
Coined as “pain points”, businesses should be addressing problems consumers have, providing solutions in the form of products or services. This addresses the fundamental question: why would someone buy your product. The more acute the “pain”, the more compelled customers will be to seek a solution.
Do they understand their customers?
A business can have the finest product but this is redundant if their customers don’t know about it. Businesses need to clearly define their market and customers, and have a deep understanding of their customers’ buying habits.
The business must be able to market their products and services effectively, price them correctly and have a running dialogue with their clients to remain in tune and relevant. Furthermore, ask who their clients are – are they too reliant on a small number of customers?
Are they responsive?
Technology and trends continue to evolve and change, altering the environment businesses operate in. Investors need to understand how responsive and open a business is to changing market demands and ways of operating.
Failure to anticipate or react to competition, technology, or other changes in the marketplace can render a business’ offerings obsolete and irrelevant. Backing businesses who embrace innovation and technology, and who are open to new ideas, is key.
Risk-taking is an important part of investing, however it’s the educated risk-takers who are most likely to succeed. As always, ask questions, read all available information carefully, and seek independent financial advice before committing yourself.