The Capital for Information About Crowdfunding Capital
In my previous post, I discussed the strategies you can employ to increase your chances of being successful at investing in Crowdfunded businesses by mitigating small business risk. In this post, I will address two other risks inherent in Crowdfunding investing – liquidity risk and the risk of fraud – and ways you can mitigate those risks, as well. For a refresher on the risks, you can revisit the “The Risks of Crowdfunding” post.
Because there is no market to sell your shares in Crowdfunding, your money may be tied up for several years before you see any returns (liquidity risk), and there is a chance that you will not get back any money at all. This will also sound obvious, but you will only want to invest money you will not need access to in the short-term, or for that matter, that you can afford to lose. The SEC limits how much you can invest based on your income (see “How Much Can I Invest in Crowdfunding?”), but that does not mean that you can do without the money you are allowed to invest. You may need it for a new car or for repairs to your house, whatever. This is more of a tip than strategy, but the point is clear – be sure you can get along without the money in the short-term before investing. To help with this tip, determine ahead of time the amount of money you are willing to devote to investing in Crowdfunding – an amount you are comfortable putting at risk – and stick to that amount when you invest.
Tip #1: Determine the amount of money you want to devote to Crowdfunding ahead of time and stick to that amount.
Another strategy you can use to mitigate liquidity risk is similar to strategies for reducing small business risk – ask yourself, based on the information the companies provide, if they have a good exit strategy. Did they state somewhere in their business plan when and how they plan to exit or sell their company? That is when you would get your money back, so it would be helpful to know how and when the business plans to deliver it. If Johnny says that he wants to buy and plant apple seeds in his back yard and build a large enough farm to be able to sell apples to every grocery store in the country by the year 2065, you may be waiting over 50 years before Johnny decides to sell and, therefore, to get your money. You will be more likely to succeed if you are able to find companies that clearly define when and how they plan to exit, at which point they can return money to investors.
Strategy #5: Does the company have a good and clearly defined exit strategy for investors?
Next, let’s talk about how to reduce the risk of investing in a fraudulent company. The first step you can take to reduce fraud risk is to choose the platform you use to make your investments wisely. Ask yourself, where does this platform source its businesses from? Does it vet the applicants itself, and if so, where do they get their leads from? Most importantly, who is doing the vetting and the research? You can check out their About Us pages to get this information, and you can even take it a step further by checking out social media profiles of the management teams.
Strategy #6: Research the platform you use for investing.
A second strategy for mitigating fraud risk is to do your own outside research on the business and the management team before you make an investment; Google around, check out the managers’ social media profiles. Make sure you are comfortable with what you find before making an investment, and do not rely solely on the data the businesses provide.
Strategy #7: Do outside research.
To help you keep all of this fresh in your mind, here is a quick cheat-sheet for you to refer to before you start investing next year.