With the passing of Title III of the JOBS Act, a much larger percentage of the population is able to invest in startups through Regulation Crowdfunding. However, there are a lot of factors to take into account when determining whether or not you should make an investment in an early-stage company. Before deploying your capital, you should consider each of the following points.
Can you handle the risk and potential loss of investment?
Startups fail more often than they succeed. You should be able to afford to make the investment as well as be prepared to lose it. Keep in mind that a return on investment can take years, so if you may need the money in the short-term, an investment in a startup might not be the right investment for you.
Do you believe in the company’s mission/product/service?
You should be excited about a company and its potential to disrupt the market before you even consider making an investment. Have you tested the product or service? You should and you should be one of the company’s most enthusiastic customers and advocates.
Do you understand the financial information and disclosures provided by the issuer?
Before you commit to an investment, make sure you understand where the company stands financially today, and where they forecast to be a year from today. Discuss potential worst-case scenarios with the founder(s) and make sure you have a thorough understanding of the terms of the capital raise. It never hurts to seek a second or third opinion from individuals with experience investing in startups.
Have you performed your due diligence?
Does the company have initial traction? Have its founders started successful ventures in the past? Was the team able to raise any funds prior to this raise? All these questions should be answered with “yes.” If the company has traction with its product or service, is being led by an experienced team and was able to obtain investments from other investors, it could be a more viable investment option.