Crowdfunding has recently spawned something more interesting for startups, and that is, crowd investing.
So, how does a startup or growth business know if it is ready (or right) to seek equity crowdfunding?
To help, we have devised 21 tests for Crowd Investing, so that you can begin to assess the strength of your investment case and also identify ways to improve your chances.
- The Mission Test (work with passion or not at all)
Does the business’ purpose connect emotionally with you? If not, ditch it because investors need to see your excitement about how your business will make lives better or do great things. They won’t invest in an entrepreneur who is excited just about the money. You need to believe that your product or service will make a difference.
- The Evangelist Test (if you believe it, will you stand up and speak?)
Are you willing to stand up in front of a crowd and speak for your company, product / service and team?
Don’t be the tech founder team looking to raise money to hire a passionate sales director. Don’t get someone else to write your business plan – it has to come from you and be a reflection of who you and your team really are and what you care about. Yes, a little help is good, but don’t delegate the responsibility.
- The Customer Investor Test (how to slash your marketing costs)
Shareholders or stakeholders who love what you do will evangelise your brand – that is, do your marketing for you.
Crowd Investing allows you to turn customers into shareholders and evangelists for your brand – it will save your startup a fortune in marketing and bring it to profitability much sooner.
Does your startup have customers who could become shareholders and who would promote your brand?
- The Phoenix Test (be prepared to Fail Well)
“I have never, never, never succeeded without first failing”, John C Maxwell, bestselling author and world’s no 1 leadership expert
This business will probably fail because 9 out of 10 businesses that receive funding fail to achieve their growth target.
So have you tested your startup point to breaking point, coped, and then re-invented it? If not then you don’t pass this test.
- The Customer Test (Do you have customers, users or product?)
Does the business have any revenue? If not, then it doesn’t have customers either. So what proof do you have that customers will buy?
A pre-revenue business can’t be worth more than £100k – so, if you want to sell 10% of equity for £100k (implicit value £1m) then you need revenue and customers. You really do need some customer orders, even if they are pre-orders.
- The Idea Test (listen to your customers to know if your idea is just a day dream)
How do you evaluate a new business idea? Start with listening to your customers not talking about the technology or science.
Do you have case studies conducted with real people in which you asked them how much they would pay for your product or service?
If not, then your idea is just a day dream. Day dreams don’t get funded.
- The Opportunity Test (when average businesses are a huge success)
Is the market potential big enough that even an averagely successful business will make money?
Does it have global potential? Does it reflect a demographic or behavioural shift? (Please avoid cyclical businesses).
Does it reflect what is actually already happening (simplifying/ digitising or cutting the cost of an existing need) or do customers need to be educated to think better (requiring huge marketing budgets and running very high risk)?
- The Bet Test (investors want attractive investment odds – not guaranteed winners)
Is your startup a good bet – for the money that you are asking and the equity that you are offering?
In the betting world you make money not when you pick dead-cert winners but when the odds are attractive.
Dead-cert winners are often too expensive – because everyone wants a dead-cert winner! So, does your deal look attractive given your current level of development and customer activity?
- The Rewards Test (Its about more than money)
Crowd Investing is a great opportunity to not only share equity for cash but also to offer your product, service – or an enhanced service.
Are you offering rewards which add value and relate directly to your product / service or rewards which strip value away by creating unnecessary costs?
- The Right Price Test (all investments are fundable at the right price)
Investors expect to double their money every 4 years – and allow for only 1 in 10 of their investments to succeed. So, if your startup turns out to be the success, can you offer investors a potential 20 fold increase in their money? So, a £50k investment needs to have the *potential* to be worth £1m in four years.
If not, then the incentive to invest will be too weak and you’ll fail this test.
- The Cash Test (are you asking investors for enough money?)
Investors need to know that you are raising enough cash. Why?
Well, if investors place £100k into your startup – but within 6 months you need to raise a second £100k – just to keep going, then you have just increased the risk for the first investment.
That is, if the second round of funding fails, then it is likely that the business will fail and the first £100k will be lost. So are you asking for enough? Investors need to know that you are.
- The Imperfection Test (all startups are born imperfect but only some get better over time).
All businesses and their plans are imperfect; the question is whether your team that can get the business back on track, again and again, after snow storm, rain, wind and thunder. And also the occasional crash landing.
Or, is the imperfection a result of giving up too quickly or just being a bit lazy or falling into arguments with your fellow founders?
Businesses require hard work and great team work – can your team deliver, even in the face of huge setbacks?
- The Action Test (can you deliver despite hardship?)
Can your team take action?
Can you deliver? Can you manage costs? Can you deliver revenue? Can you hit deadlines? Can you solve problems and overcome hurdles? Can you handle the pressure? Can you match people to problems – that you have never encountered before? Can you share their passion and connect with potential employees, freelancers, stakeholders and investors? Can you lead a growing and talented team?
Can you and your management team, Just Do It?
- The Reflective Team Test (can this team learn from its actions?)
What key factor makes a successful management team? It is the ability to pause and reflect to collectively allow insight and understanding to catch up with the team.
Startups are highly explorative and highly explosive. This requires a careful mix of both action and reflection.
Without action there can be no reflection but without reflection we can never increase the effectiveness of our action. Does your team pass this test?
- The Perfect Pitch Test (do you speak to your investor’s concerns or just blast them with your idea?)
Many entrepreneurs pitch yet few connect. In the pitch the myth is in that communication took place – You Speak, They Hear – two different things.
The purpose of the crowd investment pitch is to connect – emotionally – with your audience. Yes, crowd investors are human too even if they sit behind a digital interface.
- The Law of Transparency (bin the NDAs and show your dirty laundry)
There are no secrets in crowdfunding – its all open – and even your competitors can invest in your business and read your investment proposals and keep track with on performance via shareholder reports.
Entrepreneurs who try to cover bad stuff up will be exposed in the open environment of crowdfunding. Does each member of your team pass this test?
- The Crowd Test (how to create investor momentum)
The Wisdom of Crowds reduces error when each crowd member has full disclosure and makes independent decisions.
That is why transparency is important for both the investors and the entrepreneur – it allows the crowd to stop you, the entrepreneur, wasting your time and other people’s time on businesses that won’t work and helps those that do have a great business to get going faster.
Do you have a community of supporters, customers and potential investors who will promote your investment pitch and encourage others to invest, as well as investing themselves? Do you pass this test?
- The Last Resort Test (make sure you choose crowd investing first)
Are you bringing your deal to crowd investing websites because you can’t get funding elsewhere?
No investor wants to believe that he or she has invested in the ‘last resort’.
Have you selected Crowd Investing because it is your preferred route to funding? Honest answers now…
- The Hang Out Test (where does your ideal investor hang out?)
Traditional business angels (small numbers with deep pockets) will want an independent director on your board.
New business angels (many, with shallow pockets) will want to see less money or commission going to the crowd invest platform.
Where does your ideal investor hang out and which crowd investment platform offers the greatest opportunity to get in front of your ideal investor?
- The Investor Trust Test (Investors want to feel cared for)
Although investors want to make money, they also want to feel cared for too.
They need to believe that you will take care of their interests and return their faith in your team and your business by genuinely doing your very best to achieve the goals you set out and delivering a financial return to your investors.
Investors also love a business which is happy and fun. Don’t underestimate this! The more you trust your investors and include them in your business, the greater trust they will put in your team (and that includes money).
- The Exit Test (don’t create a low growth or lifestyle business)
Every investor needs an exit as do the founding entrepreneurs. What is yours?
Some businesses will exit via a trade sale, others via an IPO or possibly generate steady income and dividends to return original capital and a profit to shareholders.
Whichever exit you envisage, the investors need to believe that you are serious about an exit and returning their money with profit. Do you pass the test?