10 Best Investment Tips – Crowdfunding 101 In A Nutshell

While not all-inclusive, here are my 10 Best Investment Tips, or Crowdfunding 101 In A Nutshell.  It will serve as a quick overview of the basics to know before you jump into the world of startup investing.

For those of you already investing in startups, take a quick look.  Angel investing is a continuous learning process.  You never know what you might learn.

In this post, I’ll talk about things you should know and refer to tools and platforms to consider using and/or joining.

THIS POST MAY CONTAIN AFFILIATE LINKS. PLEASE SEE MY AFFILIATE DISCLOSURE FOR MORE INFORMATION.

Let’s get started…

Understand The Risks And Define Your Investment Limits

This is a critical fundamental to understand.  Investing involves risk.  It doesn’t matter if you’re investing in a startup, stocks, real estate, etc.  All investments have risk.

Only invest what you can afford to lose.  If losing your investment will affect your current lifestyle, don’t do it.

Start small and, as your comfort level and funds allow, build up your portfolio.

One other thing to note…  Startup investing is a long-term investment.  Don’t expect any results (whether it be a return or a flop) for 5+ years in most cases.  Sometimes you can see results sooner; other times, much longer.

Educate Yourself

As I said earlier, angel investing is a continuous learning process.  Take the time to learn about the startup/crowdfunding investment class and process.

There are several resources out there, from the crowdfunding platforms themselves to community-based sites like this one, where you can chat with other members, share opinions, and so on.

The more you prepare, the better your investment choices will be.

Join A Crowdfunding Community

I know that I just said this but join a crowdfunding community.  I am a member of several myself.

I’m the Virtual Chapter coordinator for Angels & Entrepreneurs and the founder of Angel Powwow, a place for members to bring any deals they want to talk about to the forums.  There, they can discuss what they like, dislike, ask questions, and provide general opinions on the opportunities.  Think of it as a crowd due diligence.

I’m also working on educational courses and have created several tools to help people evaluate potential opportunities.

Other memberships and services I’m currently subscribed to include Equifund’s Investor Incubator and Kingscrowd’s Pro service.

Develop An Investment Policy

This should be the first document you create.  Think of it as a pre-filter in your due diligence process.

You’ll set goals, define your target markets, estimate the number of investments you plan to make, set your average investment limit, and so on.

Once defined, you can run potential opportunities past your investment policy to quickly weed out those that aren’t a good fit.  Anything that passes can be placed into your due diligence stack for further processing.

Angel Powwow offers an Investment Policy Creation Tool to the paid membership levels.

See What’s Out There

Once you’ve done the above, it’s time to look at the various crowdfunding platforms out there to get an idea of the types of available opportunities and their terms.

Here’s a shortlist of the ones I tend to use the most:

• Equifund
• Republic
• StartEngine
• Wefunder

There are many more, but those are the ones that I find most of my investment opportunities on.

Pay close attention to the security type and other terms such as conversion terms, repurchase rights, and so on.

Don’t Believe The Hype

The raise pages are all about making the sale (aka, getting you to invest).  They’ll only show the good, hype up what similar companies have achieved, and so on.  It’s easy to get caught up in all of it.

Do your Due Diligence!  Now’s the time to dig into the documents of the raise.  Look at the team.  Do they have the skills to make this company a success?  Do they have a track record to support this?  If they don’t have everything covered themselves, do they have a team to fill the gaps?  What security is being offered (Equity, SAFE, profit sharing)?  What are the terms?  Do you receive voting rights?  Is the market big enough to grow into and provide a decent profit?  What about competition?  Does the company have protections in place (i.e., patents, regulatory approvals that are difficult to acquire, etc.)?

This is just a small example of questions you should be asking, but it’s a good starting point and should get you in the right mindset to evaluate potential opportunities.

One other thing to note…  Some opportunities are just terrible, but they present themselves so well that people hand their money over without looking at the terms.  Be aware, and read the fine print.

Understand The Hidden Costs

Here’s one that no crowdfunding platform will tell you…  When a company gets acquired, merges, goes public, or through some other event becomes publicly tradeable, you can’t just sell your shares.  Besides any defined lock-out period, there’s a clearing or deposit step that you must go through, and most companies aren’t going to foot the bill for it.

That’s right; you’ll probably end up having to pay a broker to deposit your shares into an account before you can sell them.

Sadly, there’s no set price.  It can vary from broker to broker and even take your relationship with that broker into account (i.e., if you rarely trade with them, they may charge you more to deposit your shares, etc.).  A good rule of thumb is to expect anywhere from $1K to $2K to have this done.

One caveat to this is that some platforms have a secondary trading market, where you can sell or trade your shares with other crowdfunding investors (think of it like a pre-stock market that only deals in securities sold on their primary platform, and only a select few at that).

Another consideration to keep in mind is that some platforms charge a “lead investor tax.”  One such site will take 10% of your profits as compensation for that lead investor and their holding company.

Be sure to keep these costs in mind when evaluating deals and determining how much to invest or if a deal is worth it with the additional cons added to the list…

Spread Your Investments Out Evenly

You can do all the due diligence in the world, have high confidence in an opportunity, and still watch it crash and burn.  Because of this, you should consider investing the same amount in each opportunity you invest in.  The reasoning for this is that you never really know which deals will be winners or how much those winners will return, and which ones will fail.

Let’s say you put $5K into opportunity A because you have the highest confidence in it.  Now, let’s say you put $1K into opportunity B because it passed your due diligence, but you were just “eh” about it.  Now, for whatever reason, opportunity A failed miserably, and you lost all of your investment.  Opportunity B not only needs to be successful but now needs to provide a 6X return to break even (covering the $5K and $1K you invested).  If you only invested $1K in opportunity A, a 6X return on opportunity B would give you a profit of $4K.

As your investment prowess improves, you can consider changing your investment strategy a bit, but until then, this is a safer approach overall.

Diversify Your Portfolio

Although it’s important to invest in what you know, don’t put all of your eggs into one basket (i.e., all TeleHealth opportunities).  Diversify your portfolio to protect against massive losses should a particular sector suffer a decline.

If you lack expertise in a particular category or vertical, reach out to your crowdfunding community (that’s why I said to join one) and seek another’s.  I did that myself not too long ago…

I am not in the medical field.  A medical opportunity presented itself during an event, and I happened to be sitting next to a doctor in that particular exact field.  I picked his brain left and right and then chose to invest based on his qualified opinions.  That’s the power of joining a community and building a trusted network.

Jump In And Enjoy The Process

There’s no better way to learn than by doing.  After you’ve taken a little time to get the gist of things, hit a crowdfunding platform and make an investment or two.

Going through the process will help you gain more confidence and an understanding of how it all works as well as what to expect in future investments.

10 Best Investment Tips Conclusion

Those are my 10 Best Investment Tips (aka Crowdfunding 101 In A Nutshell).  It is by no means everything there is to know about startup investing.  It’s more of a glossing over of the basics.

Expand your knowledge, build your network of trusted investors, and start making well-considered investments with the potential to bring amazing returns.

If I were to pick the most important tip here, it would be to join a crowdfunding community.  They’ll provide education, a place to network, and so much more.  Although I hope you’ll join Angel Powwow, joining virtually any community is a step in the right direction.

I hope that at least one of these tips helped you.  I may expand on them in a future post, so keep an eye out.

So, what do you think of these tips?  Do they make sense?  Did you find them useful?  Is there something I missed?  Is there something you’d change, add, or remove?  Let me know by commenting below.

Thank you,

Scott Hinkle

AngelPowwow.com