Business Evaluation Primer for Non-Accredited Investors

“I keep six honest serving-men: (They taught me all I knew);

Their names are What and Why and When, And How and Where and Who.”

— Rudyard Kipling, The Elephant’s Child

The Five W’s and How are well known by news reporters, but the checklist can be useful in other situations. Nearly every day I get questions from non-accredited investors about crowdfunding. “I want to get involved,” they say. “But give me some pointers.” So, in the interest of answering their queries and making it all-round easier for me, here’s my Business Evaluation Primer for non-accredited investors, who are interested in crowdfunding capital growth opportunities. I’m using Kipling’s checklist (and between you and me, we’re just following the same rules that the guys who raise money for a living follow).

WHAT Do You Know About The Business?

If I’m a retired restaurant owner, I probably have a good idea about what another restaurant owner needs to succeed. If I’ve produced widgets for 20 or 30 years and I’ve done good business, then I am more likely to understand the problems a small widget company in my community faces. If you’ve invested in a business you understand and things don’t go well, you might be able to step in and give the owner some help. But if you don’t have any knowledge of or experience in the business, all you can do is be frustrated that your investment is floundering.

WHO Is Running The Business?

If you are going to invest in a business opportunity, take the time to understand the owners, their values and their capabilities. Ask them questions, such as:

• Have you done this before?
• Who are the other managers on the team?
• What is your unique competitive advantage?

The simple questions are often the most important ones to ask. The more you know about who the management team is and whether they are top-notch, the more confident you can be about your investment.

WHERE Will Your Money Go?

Be clear about where the company plans to use the money it raises. This is equally true for donation-based crowdfunding. For example, thousands of people contributed to a relief fund to help victims of the Boston Marathon bombing. They may not have known the people who organized the campaign, but they did have a clear idea where their money was going. It’s just as important a concept for investing in a small business.

WHY Are You Investing?

Examine your motivation for investing in this opportunity. Even if it seems obvious, your investment is highly illiquid and deserves thorough consideration. Business plans change. A company could raise half a million dollars with the intent to franchise, but then be faced with an economic downturn. The funds raised may no longer be used as they were originally intended. Or, another business opportunity comes up and management decides to use the money for something else.

• How will changes in planned investment affect your satisfaction level with the Owner?
• How are you going to react to changes in direction due to unforeseen circumstances?

Bad actors come out when things go wrong. Yelling and screaming — and worse — is just not healthy, for you or for your investment. If you know why you are investing, it will help you determine whether you can handle change and therefore, if you should invest.

WHEN Will You Get Your Money Back?

Most people don’t realize there is no secondary market for an equity investment like crowdfunding. If I buy Apple shares, I can sell Apple shares 30 seconds later. But a crowdfunding investment is a long-term decision. Before you agree to put your money in, think seriously about when and how you’ll get your money out. Some of the safer investments that non-accredited investors can look at are asset-based. If things don’t work out like you think they will, there’s still a house, commercial office building or equipment to sell. At the end of the day, there’s a tangible asset you can sell for some price. That might not be true if you’re investing in an idea or a concept. You could lose every dime. Think about when you can expect to get your money back and how you can get out of a deal before you ever get into it.

Finally, HOW Will You Know Your Investment Is Doing?

As a non-accredited investor, you should expect to get information periodically about how your investment is doing. Ask how the business owner plans to keep you informed. The business is either going to do better, or it’s going to do worse than the owner originally planned. But, in either case, you need to know how your investment is doing and how often you’re going to get information about the progress of the company or project.

This quick checklist is a start to giving you a basic idea about whether or not you are ready for crowdfunding investment opportunities. A crowdfunding consultant with formal investment experience can help you further by going into a more in-depth analysis of your individual situation.