One definition of due-diligence is the “action that is considered reasonable for people to be expected to take in order to keep themselves or others and their property safe”.
In reality that is what it is about.
Investors and their money are easily parted but they need to make sure that the value they exchange their money for remains valuable and hopefully increases.
Below I answer three important questions you should consider before investing in a crowdsale offering.
Who does it?
Many people can … and do do due diligence!
- The Crowdsale Platform: First most platforms are selective. They curate offerings that are presented to them. They want successes. Successes drive their businesses more than anything else. As general rule the platform wants to ensure that the offerings are fair and not misleading, that the platform and the issuer are working from an integrity base and of course give full transparency
- You the Investor: Do your own research! Ask around. Dont take everything for granted. Don’t totally rely on a third party. Seek counsel from your respected advisors.
- The Crowd: History has shown that if there is anything misleading about a crowdsale offering the crowd points this out long before the regulator does. Trust in what the crowd is saying.
- The Issuer: The entity raising funds has the obligation under legislations to do certain things. This helps you make your decision. Some items though are up to the entity to disclose. Before placing offerings on a Crowdsale platform some issuers perform extensive due diligence. Others are more casual and let the crowd determine what are worthwhile investments.
- Security Type: Whether its a debt based offering or shares each comes with its own protective levers. Things like loan to asset ratios or minorty shareholder protection etc ensure that fundamental ground rules to protect investors are in place.
- Asset Class: The underlying asset in a crowdsale also determines what needs to be looked at. If it is a property then there are land titles to look at. If it is a tech company there are things like eyeballs to consider
What is looked at?
- Team: The best companies have a team that are grounded, balanced (you have the marketing Steve Jobs and the technical Steve Wozniak), passionate, experience, enthusiastic, credible, capable and likeable. A tall ask you may say but as a lot of this is subjective what is checked by the professionals is usually not much different to a comprehensive credit check. If that part comes out OK then you yourself can check the other parts.
- Story: There are often two stories told here. The one told to raise the capital and the the other is about what the business actually is. In other words how it makes money. Often you are pitched 90% of the first and if you are lucky 10% of the second. Make sure you make a balanced assessment here. The pitch to raise funds is often very seductive and the actually way the business will make money is much less easy to determine.
- Traction: Often the thing that eventually gets professional investors to put their hands on their pockets is TRACTION! Evidence that the business model is working and scaling. For early stage opportunities traction it is not always about revenue.
- Sector: Every sector has its own method of measuring success. Check that within the sector this opportunity fits in the success frame.
- Business Model: How does this opportunity make money? Is that realistic? Is there a long term runway for this type of business?
- Financials: There should be some. Better still if they are signed off by an accountant. If there are none then a lot more focus needs to be put on other factors.
- Intellectual Property: Most important is to check that the intellectual property associated with this offering is actually legally owned but the entity seeking capital. You want to know that your are invest in what is getting pitched at you.
What are possible outcomes?
Success or Failure: It is important to remember that not every business succeeds. Just because a business fails doesn’t mean the due-diligence was bad. Sometimes the time was just not right for the opportunity. No amount of due-diligence can stop a genuine business failure.