As a potential investor on the hunt for the right addition to your portfolio, it makes sense that you may be feeling trigger-shy in these uncertain times. But in some ways, there’s never been a better time to invest, particularly in smart startups.
2022 has had a rocky start. The tail of the pandemic, the crisis in Ukraine, floods at home, and rising interest rates have made for an extremely uncertain investment climate. Needless to say, investors are feeling wobbly. In fact, at the time of writing, CNN Money’s Fear and Greed Index sits at 15, or ‘Extreme Fear’.
Investing has never been easy and the current state of the world presents a few more variables that people need to consider. However, it is worth remembering that investment has seen itself through times of great uncertainty in the past and has come out the other side.
Many would argue that this is the perfect time for investors to back more startups that have a real purpose, and are addressing serious gaps in their respective markets.
Investing has evolved
Unlike during the time of the 1929 World Stock Market Crash, investors today have a number of alternate investment options at their disposal. Many of which are more protected than traditional stock options.
Equity crowdfunding is one such option. This type of investment channel makes it simple for retail and wholesale investors alike to back startups that they really believe in.
Carrying out stringent due diligence is always paramount. Reputable equity crowdfunding platforms will conduct thorough research into any venture that is looking to list on their platform, gathering information about an enterprises’ corporate structure, intellectual property rights, commercial contracts, key management personnel, financials and litigation to ensure that their business and intentions are legitimate.
An upside to this means that some of the pressure of due diligence is removed from the individual investor.
4 things to consider when looking to invest
Here are a few things to pay attention to with an equity crowdfunding platform’s due diligence process:
1. Human capital: Who’s who in the startup?
It is vital to understand the context of a potential startup and its founders. Investors should look out for platforms that familiarise themselves well with the venture founders, understand their reason for starting their company and the impact they are looking to make. Savvy marketing on the platform should also make all these points very clear to investors at first glance.
One important thing to consider is whether external advisors are engaged or not, and how formally they are engaged with the startup. Advisory assistance is crucial as most startups are lean by design and don’t necessarily have the full depth of knowledge and breadth of experience to scale their business. Having an advisory board filled with relevant experience and expertise is an indicator that the necessary support is in place.
2. Financial plans: Do the numbers stack up?
In a perfect world, a venture’s financial reports would lay out a clear financial case for the business. Corporate and legal structures would be transparent and unambiguous, not complicated with multiple entities and confusing holding relationships.
Investment platforms should be able to communicate to investors the financial metrics that matter. Depending on the stage of the raise, some ventures will not have detailed financials, and perhaps no historic information at all.
Therefore, a capital management plan becomes critical so investors can understand how a venture’s management chooses to raise, generate and spend capital, the efficiencies with which they handle capital, and how this allows the business to keep growing.
3. Intellectual capital: What’s the secret sauce?
This relates to the intellectual property of a business, as well as the intellectual capital of the team, especially across engineering and technology ventures that are focused on AI and data science.
Intellectual capital is often the secret sauce of a new business, especially a product or technology-focused one. It is important to understand who owns this and that it is protected in terms of the future growth potential of the company.
4. The market: Is the world ready for this?
Innovative ideas, focused founders, quality teams and early financial success all mean nothing unless the runway is clear and the growth story is believable and sustainable.
The market sets the trajectory and the landing zone. Therefore, it is important to understand that the management is basing their business decisions on thorough market research and data. And an extra-large dose of product and customer testing, with a process sympathetic to a design-led approach.
Investors need to be comfortable that the businesses they are backing are resilient and adaptable to market fluctuations, have good marketing strategies in place and have a contingency plan. Or, that the founders have the capability to pivot when needed. As we have all seen, circumstances can change on a dime, and you want to ensure that the founders you’re backing can adapt accordingly.
We believe 2022 is set to be an exciting year for startups because challenges often breed creativity. The COVID-19 pandemic was a classic case in point as companies such as The Happy Organiser and Bubble Tea Club were startups that launched during the peak of the lockdown period.
Inspiring entrepreneur, Stephanie Nweke, once said: “In a world full of uncertainty, follow purpose”.
And there is no better time to back ventures that are looking to make a real difference.
By Chris Wilson, Head of Venture Capital at VentureCrowd
This article was first published by Kochie’s Business Builders