New regulations, new opportunities. That’s the sentiment in the crowdfunding space, as Title III of the JOBS Act is spawning a new era toward the democratization of all sides of the market.
With investment in early-stage companies no longer limited to only the ultra-wealthy, brand loyalists and startup speculators alike are able to share in the upside of the next wave of economic growth.
On the other hand, previously under-noticed, under-appreciated, and underfunded segments of the entrepreneurial ecosystem – namely female, minority, immigrant, and ‘second-tier city’ founders – can now find more accessible fundraising opportunities.
Not surprisingly, many are looking to join in on the action, with thousands of would-be crowdfunders popping up worldwide. And while most players in this space likely bring positive intentions, there is inherent risk in the early days of establishing credibility as a sector.
Equity crowdfunding is already playing a significant role in the development of early-stage companies, providing them support, en masse, with terms that favour the founder and a network effect that can offer multiples in investment and customer activity.
However, it is the responsibility of the platforms to ensure things are set up properly – that is to say that a focus on professionalism and risk management cannot be understated. It’s important to address these elements now to avoid issues and complications later and to be ahead of the curve on evolving compliance considerations.
At present, it would seem that many platforms are ‘just winging it’, likely a combination of needing deal flow (particularly new sites) and the fact that the industry is in its early days from a regulatory perspective.
It is my belief that the best groups now, and the ones that will thrive into the future, are those that bring an organized and systemized approach to their operations, most importantly in company evaluation and research. Due diligence can be a headache for a team seeking investment at any stage, but it is crucial to make sure red flags aren’t slipping through the cracks.
A thoughtful process that is professional, efficient, and avoids wasting time can add value to the founders and showcase seriousness and organization. It is a great indication of potential success for all involved, leading to an increase in sound investment opportunities, which bodes well for the investors (who are more likely to re-invest), the entrepreneurs, and of course the crowdfunding platforms which will find continued traction as a result.
Here are some general things to look for in a credible crowd-investment platform:
- Success of prior campaigns (funding rates)
- Marketing & promotional expertise
- Security and ease of funding process
And an organized due diligence and onboarding process communicated throughout to:
- Identify possible indications of fraudulent behaviour
- Research founder history, background, and team member commitments
- Research company history, and any prior filings
- Look into market size and conditions as these are often misstated or misrepresented
- Confirm user or revenue traction details
- Develop methodology for company evaluation
- Engage 3rd party for independent and objective due diligence (best practice)