According to Forbes, Crowdfunding is by definition, “the practice of funding a project or venture by raising many small amounts of money from a large number of people.”
Seemingly a ubiquitous investment platform nowadays, crowdfunding opportunities continue to capture Filipinos’ attention. The promise of supporting a start-up or an already established company that “boasts” great success potential is very appealing. I am thoroughly fascinated and equally wary of this.
Having to take part in a couple of crowdfunding deals myself and learning firsthand the lessons of my closest friends who have also entered in similar deals, we can learn as much, if not more, from experience – to avoid promising paths that turn to dead ends.
If you are in a crowdfunding deal now, or is about to, here are a three guides that I hope to help you make that final decision whether to give it a go or to stay away.
1. Pay careful attention at the Business Model. A step-by-step plan of action for profitability in operating the business, the details of the business model will tell you if it is a hero or a zero. The business model should include the target customer base for the business, projected startup costs and sources of financing, competition, marketing strategy, and projection of revenues and expenses. According to Investopedia, “one of the most common mistakes leading to the failure of business startups is a failure to project the necessary expenses to fund the business to the point of profitability.” Don’t be lured simply by the promise of “lucrative returns.”
Look into the model, scrutinize, and ask. It is your money and you have all the right to ensure it will be with the safest hands possible. You must have the highest degree of caution because some business models that might be presented to you simply don’t make sense and the numbers don’t add up to the potential profits.
Another tip, make sure they have Plan B, Plan C or even Plan D incase their first few strategies don’t work.
2. Do background check of the team or person behind the business. Protect yourself from wolves in sheep’s clothing. Are the people running the business highly qualified? What are his/her track record of successes in that particular field or similar ventures? Listen to the details of their stories and presentations. Spot their work etiquettes, their life values, their view on money and profit. Be bold in asking questions. Also, it is important to know if the person or the team is quick on handling queries and concerns. The last thing you want to be in is finding yourself hanging with so many financial and legal questions after you have invested your money and they take forever to get back to you because they claim they are busy.
The people who will present their business plan usually are the most charismatic people. Take caution. The trickery is so sly and cynical that you almost have to admire it. Make sure that in the in the end, you will be investing on pure competence. As Frank Underwood of House of Cards once said, “Competence is such a rare breed in these woods that I appreciate it when I see it.”
Another tip, listen to your gut. Successful entrepreneurs do. If for some reason it just doesn’t feel right, then most probably you are right. As the saying goes, if it talks like a duck and walks like a duck, most probably it is a duck!
3. Look at your asymmetric risk – reward. Everything is all about risk and reward. You must have a limited downside but limitless upside. Usually, the crowdfunding pitchers will only tell you your “figurative” upside. Look into it. Is that pre-tax? Is that the net? Is that after considering all the potential expenses along the way? Math doesn’t lie. If you want to be a successful investor, you must learn to love or rekindle your love with numbers.
For example, the presenter tells you that one share will cost you PHP200,000 with the promise of getting your investment after five years with a forecasted profit share of 5% annually. With this, your potential downside is PHP200,000. Your upside is getting back your money after five years with an unguaranteed forecasted profit share of 5% a year. If for some reason, the company overlooked many expenses topped up by the economic downturn, you are saying goodbye to your upside. Will I invest and give my money to this presenter? My answer will be a big thank you and a bigger no.
Another tip, make calculations that will allow you to live with it. Your downside must be something you can live with if something goes wrong. Just because someone is asking for money doesn’t mean you have to give it. Guard your hard-earned money with your life.
Is crowdfunding for you? While we are all part in this romantic search for a way of investing with real meaning, at a time where the culture openly welcomes crowdfunding with open arms, always remember the paramount value of taking one’s time, paying attention to details, and putting in the legwork to hunt for potential investments that are of great value.
If you want to learn more about Entrepreneurship, you might be interested in attending our Investhusiasts’ NegosYOU Forum this July 20, 2018 at Hyatt Place Hotel, Al Rigga. Topics will be from building your power business plan to making your business known through digital marketing. Email us at firstname.lastname@example.org if you are interested.