SeedInvest, a leading securities crowdfunding platform in the US that is expanding its business into Europe, has published a timely blog post addressing the challenging fact that most startups fail. In fact, SeedInvest points to data that indicates that 90% of all startups fail. That means you lose all of your money if you are an investor. While this may generate an interesting tax write-off for certain individuals if you are a smaller investor participating in a private security offering you may not be angling for tax reduction.
First, and foremost, you must recognize the intrinsic risk involved with early-stage investing. Only participate in securities offerings where you are able to take a loss – perhaps all of your money. Simultaneously, you need to do your own due diligence to ascertain which investment crowdfunding offerings are good and which ones are, well, not so good.
It is a fact that a great company can be raising capital using crappy deal terms. Simultaneously, a not-so-good company may be offering terms that appear solid. Either one can lead to a bad outcome. SeedInvest has itemized the items you should consider before making an investment. In a blog post, SeedInvest recommends you consider the following:
- What market the company will enter
- How does the company fit and compete in that market
- The backgrounds of the firm’s founders
- The short-term and long-term goals of the business
- Whether the startup in question will abide by the terms of the investment round
- The potential that may or may not exist for your investment to be profitable
Unrealistic objectives or overly optimistic predictions can set up any investor for disappointment. It is vital that you review and understand the objectives of the company and their chances of executing them.
Additionally, you must understand the deal terms including valuation, needs for future funding, your expectations for an exit, and if you are protected in case of a future dilation. Better to have the answer to these questions before an investment is made instead of after.
SeedInvest, notes that while their process does not replace your own responsibility to complete your own due diligence, they do complete a vetting process and review offering documents internally to determine whether or not a security is listed on their platform. Private securities can represent some exciting opportunities to back a company before it gets big – just like a VC. But like a professional investor, do your diligence before you commit your money.
There are several common issues an investor may experience during the due diligence process, including:
✅Unrealistic Goals
✅Product Limitations
✅Weak Term Sheets— SeedInvest (@SeedInvest) June 14, 2022
