Investor Checklist – Should I Invest in a Crowdfunding Campaign or Not?
If you are thinking of investing in an equity crowdfunding campaign on Spark Crowdfunding but don’t know what factors you should take into consideration, we have prepared a checklist of ten things you should consider.
We would caution against an investment unless it ticks most or all of these boxes:
1. The Business Model
Is the business scalable? A scalable business is one that can increase profits over time, by growing revenue while avoiding cost increases. Another way to describe a scalable business is one which can serve an increasing number of customers without having to increase its costs as a result. For example, a company that sells software can sell the exact same software to many customers, without increasing its costs by much. A hairdresser, on the other hand, is limited by the amount of hours she works and can therefore only serve a limited number of customers. Scalable businesses have the potential to grow much faster and therefore deliver a higher return for investors.
2. Size of the Market
How large is the market that the company is targeting? You don’t need to know to the exact penny how big the market for a particular product is, but you should be able to make a good, educated guess as to whether it is big enough to allow the company to achieve its Sales targets. Factor in the level of competition, both actual and potential.
3. Intellectual Property (IP)
Does the company have any IP, such as a Patent, that can protect it from new entrants to the market? Patents are extremely difficult and expensive to get, and most successful companies have no patents, so this factor should not be a deal breaker, but look for quasi forms of protection, such as a large database of users or a strong brand.
4. Company Achievements to Date
Companies raising funds on Spark Crowdfunding tend to be at an early stage in their evolution, but before they raise funds, they should be able to point to some level of achievement. This could be anything from a successful pilot exercise with a Minimum Viable Product to a signed contract from a paying customer. Another achievement could be in the form of third-party validation from Enterprise Ireland through participation in its High Potential Start-Up (HPSU) programme.
5. Quality of the Management Team and Previous Successes they have had
Does the Management Team have the skills, knowledge, attitude and aptitude to successfully execute the Business Plan? What have they done in previous jobs or with previous companies to support this? Don’t necessarily rule out someone who has had a previous business failure. Every failure is a victory if you learn from it.
6. Use of Funds
To what use are the new funds being put? Funds being used to increase bottom line profits are generally preferable to funds being deployed to build an infrastructure that only then starts to increase bottom line profits. Related to this is whether the amount being raised is sufficient to enable the company to deliver on its plans or whether it will need to raise funds again. There is always a risk that a company may not be able to raise funds the next time.
How long is it likely to take for the company to execute its business plan and what risks are associated with this? Related, what is the likely timeframe for investors to get an exit and what form is that exit likely to take – trade sale or flotation?
8. Company Valuation
Valuing early stage companies is difficult. A basic question to ask is “Am I likely to get a minimum of 3 times my investment back and ideally five times my investment?”
9. Tax Breaks Available
Can I get a tax refund on my investment? In Ireland, many companies qualify for the EIIS Scheme, which means investors in these companies can receive an immediate tax refund of 40% of the amount they invest. So, if you invest €1,000 in a company, you get an immediate tax rebate of €400. In effect, you are investing in the company at a 40% discount, which has a substantial impact on your net return.
Here are two articles we have written about the EIIS Scheme:
10. Who else is investing?
It’s always useful to see who else is investing in a campaign. You can easily check this by looking at the campaign page on the Spark Crowdfunding website. You can also join one of the Investor Clubs operated by Spark Crowdfunding by clicking here: https://www.sparkcrowdfunding.com/investor_club/
HOW TO JOIN SPARK CROWDFUNDING
If you’d like to join thousands of Irish Investors and get exclusive access to investment opportunities in some of the leading Irish start-ups, click here to join Spark Crowdfunding: https://www.sparkcrowdfunding.com/register
It’s free to join and only take a few minutes to register your profile.