My 7 Essentials for Crowdfunding Investing
By Shavasb Bohdjalian
A core challenge in private project investment is understanding the risks involved and determining whether the projected returns are achievable. Does the company have the resources to meet their business plan targets, make annual coupon payments on debt, or successfully execute an exit strategy for equity offerings? These questions are essential to consider, as the risks in private investments can be as high as those in public markets, where listed companies face similar operational risks and are equally vulnerable to failure.
My Essentials List for Crowdfunding Investment Decisions
1. Know the Business Model
Like Warren Buffet, I invest only in businesses I understand. This means being able to clearly see the growth potential of the project before committing funds.
2. Look for Clear Communication
My next step is determining if the project owner can clearly communicate their business, current status, and long-term goals without resorting to jargon. Confusing language often suggests a lack of transparency, and I avoid such investments. Many confusing white papers I’ve encountered have belonged to companies that later failed to meet their targets.
3. Analyze the Key Investor Information Sheet (KIIS)
The KIIS is a critical tool, providing details on:
- The company’s structure, primary shareholders, and board composition
- Business focus and rationale for the fund-raise
- Fund allocation and expected benefits to shareholders
- Interest rates, fees, and net returns for debt investments
- Risks, potential losses, and overall investment categorization
A clear KIIS allows investors to assess both potential returns and risks.
4. Examine Financial Statements and Valuation Justification
Audited financial statements show the company’s financial health, leverage, and past performance. I look closely at how a company is valued—whether based on historical performance or projected earnings using discounted cash flow methods. A high valuation without substantiation is a red flag.
5. Evaluate the Project Owners and Management Team
I examine the expertise and market position of the project owners and management team. Established firms with a solid track record provide confidence. However, a well-founded startup led by experienced professionals from similar backgrounds can also be attractive if the projections are reasonable.
6. Assess the Scalability of the Product or Service
Scalability matters. A project’s potential for expansion—whether it’s limited in scope or has the potential to reach a vast audience—is a key factor in my decision-making.
7. Understand Drawdown Risk and Portfolio Impact
Finally, I assess the potential for loss. What contingency plans are in place if things go off course? Can my portfolio sustain a hit or even a total loss from this investment? As the saying goes, “If you can’t afford to lose, don’t invest.” A diversified portfolio can help cushion against such risks, and the KIIS should categorize investment risk for clarity.
