Control of your investments

So, I’ve invested in equity: a 3-minute ABC

Nowadays, with the opportunities generously supplied by numerous crowdfunding platforms, equity investments have become accessible to everyone. So, this is the moment — you have considered your risks and realised that you have an X-amount of money to invest in the equity of a startup. What’s next?

It’s exciting and a bit scary at the same time — you want your investment to grow and bear fruit, not to become someone else’s ground for a failed experiment. How should you choose the right platform to invest from?

Consider your goals

First of all, try to honestly answer the question, “What is my goal?” If you are hoping to enforce your sense of community by belonging to an exciting project or group of people, it’s one story. If you’re in for the profit — it’s another one. Nobody says you can’t have both, but you definitely will have to prioritise different things when you’re choosing a project for investment. Remember — early-stage companies are speculative and carry a lot of risk.  

Make your own due diligence

All investments begin with a deep and detailed understanding of the market. Then comes industry analyses. Such knowledge will allow you to see the performance ability of any given industry.

So, if you are in for the profit, you will really want to know:

• Does a company raising funds have a sound business model with existing market traction? Is there any evidence that there is a demand for their product?
  If not, then remember — more red flags mean more risk.
• Is there a business plan? What channels does the company use for marketing and distribution?
  You need a detailed understanding of how the money raised will be used, what’s the timeline and when’s the exit.
• Does the company have a monetization model that leads to growth? Is there a clear exit strategy?

Ask yourself who would want to buy that business in the next 5 to 7 years.

• Is there a possibility of income before the exit?

Assess the chances that the company will be able to pay dividends.

• Is there a professional team to manage the business and your investment? Remember — these are people whose decisions will make the business flourish or fail.

On equity crowdfunding platforms like CrowdedHero, these factors are carefully included in the platform’s business model. CrowdedHero’s team not only focuses on presenting exciting startups to invest in, but also growing companies and mature businesses with an existing track record. These projects are modelled so that the opportunity for profit and clear exit scenarios are carefully mapped out. Such an approach is comparable to a VC type of funding, which frequently comes with a high level of engagement — helping the businesses with the strategy, making introductions to suppliers and, most importantly, to clients. Moreover, the CrowdedHero team works hard to actually make the exit in the next 3 to 7 years as profitable as possible.     

In any case, it’s your sacred duty to read all the attached documents and descriptions, as well as research the availability of demand for the product, the competitors and background of the company’s management team. The more active you are in understanding what exactly you’re investing into, the more informed your investment decision will be.

Evaluate your liquidity

Equity investments are long-term, so you won’t be able to pull your money whenever you want. Therefore, consider whether you will be able to handle liquidity before you invest, as you will have to wait a while before the business is able to pay out dividends or even wait until the final exit, which will probably take years.  

Some platforms though do offer a secondary market to solve the liquidity problem for investors. The CrowdedHero platform already has a secondary market functionality running and is planning to introduce their liquidity problem solution in 2022.

Diversify

It’s very likely that some projects, especially early-stage businesses, will not be successful. So, as an investor, you have to understand how to spread your risks across different projects. This means that it’s smarter to invest in five projects, with €100 in each, than all €500 in just one business. Compile your own equity investment portfolio — you can consider diversifying among industries and types of businesses that you invest in.  

Remember other risks

Talking about risk deserves a separate blog post — and we promise to write about it in more detail. For now, it’s good to be aware of the different types of risk.

Risk of total or partial loss of your investment

Equity investment, especially if we’re talking about startups, is very risky. It’s good practice not to exceed 5% of your total investment budget when you invest in one startup company and 10% if you invest in a mature company with active investment management from CrowdedHero. As platforms like CrowdedHero offer a very low entry ticket, it’s not hard to follow that rule. Start small, invest only what you can afford to lose and learn about the risks.

Risk of dilution of company holding 

It’s not rare that a company may need more funding in the future. Thus, by increasing the capital in the next funding round, your share in the company may be reduced. To avoid such a scenario, CrowdedHero integrates a specified solution in a shareholders’ agreement.

Inability to influence the decision-making in the company

If you participate in a minority equity investment, you will not normally have the option of being part of the governance bodies. This, however, is not the case for businesses presented via CrowdedHero, as you may still — via an Lead investor or SPV — enter the council controlling the board’s operational activities on a daily basis. You can also rely on a strict shareholder agreement with a veto right on strategic decisions, such as changes in the management board, any merging and/or acquisition activities, company share capital increases or decreases, company liquidation or reorganization, and change of company core business activities.