How to evaluate equity crowdfunding projects

Assessing the potential of a young enterprise (such as a startup or SME) is not an easy task. Let's see below what are the main aspects to consider that will guide us in finding the enterprise that can give the greatest possible return on our investment.

Team

This is the group of people who have defined the goals of the enterprise and are setting the work to achieve them. For a young venture, the quality of the team carries a great deal of weight in the success the venture will achieve. What makes the quality of a team are:

• Skills: technical, communication and organizational skills of the company;
• Passion: how strong the personal motivation is to achieve the goal of the enterprise;
• Prior experience: that is, whether the founders already have experience in business management, particularly startups, and whether they have already managed exit strategies (company sale or IPO). Having failed startup experience is not necessarily a bad thing, as this also represents experience value in the founders' background.

A good tip is to see the LinkedIn profiles of the company's team to get a sense of these aspects.

Project

When evaluating a company's business plan, one can first keep in mind the advice of Warren Buffet, one of the world's largest investors. The first is "don't invest in what you don't understand," so if there are parts in the business you are evaluating that are too smoky for you, it is better to leave it alone. The second piece of advice is "invest in a business that can be run even by a fool," that is, one that has such good cards to win that even if it were to lose its key people it would not affect its chances of success.

That said, one must assess what is the grandiosity of the enterprise's project. In other words, how big a problem it is trying to solve. An enterprise can achieve great success if it tries to solve a strong need in the market in an effective way.

The effectiveness of the solution brings us to another aspect to evaluate: the level of innovativeness of the project. This means how much the value proposition makes a difference from the current situation. Innovation should not only be seen as the new big technologies (like ChatGPT for example), innovation can occur in the product but also in the production process for the same product. An innovation is not necessarily a drastic change but also many small incremental changes.

Market

The growth potential of the business depends directly on the size of the market in which it operates. The ideal business is one that has an "attackable" market that is as large as possible, this is because even if you manage to take a low market share it will still be good revenue. The size of the market is made by the number of potential customers and the frequency of use of the product/service.

To go along with the market size, ideally you are looking for an industry that has a strong growth trend, so you would expect that within the next few years you could achieve really substantial size.

While we have evaluated the customers, one cannot forget the others who will try to take them, namely the competitors. The ideal business is one with a "blue ocean" strategy, that is, one that opens the door to a new market where there are no competitors. When there is no such situation, the fewer competitors the better.

In the face of competitors, it is crucial to consider how the enterprise in which we invest can win. In other words, what is its competitive advantage. In every business plan there must be a clear differentiation from competitors, which may be in price or one or more product/service features.

Business Model

The business model is how the company intends to create value, that is, to make revenues exceed costs and thus make a profit. From this it is understood how revenue is obtained (from whom, through what channels,...) and what the main cost items are (arising from the main activities and resources to be used).

Then in the business model is the prospective plan for the company's growth based on planned investments and capital to be raised.

There is one aspect to evaluate in the business model of a business that determines how exponentially it can grow: its scalability. A business is scalable when it can generate incremental revenue without incurring additional costs.

The scalability of a business is generally driven by:

• Automation, meaning its processes do not rely on human intervention;
• Low skills from human labor, i.e., the more the business relies on complex skills, the harder they are to find or replace;
• Replicability, i.e., the product/service requires low customization for each customer and this may extend to other countries with their cultural, social, etc. diversity
• Reduced resources, i.e., ownership of assets is not necessary (large investments in machinery, means of production or real estate that represent costs that hinder exponential growth) or can be outsourced to suppliers.

Digital platforms (e.g., Paypal, Airbnb, Whatsapp) are the most representative examples of scalable businesses.

Strengths

When choosing a business to finance, there may be elements that reduce the risk that the business will not achieve its goals. The following are some examples.

• The enterprise already makes a profit
• A stock market listing is already in the business plan
• The venture is being followed by a startup accelerator or venture capital fund
• The enterprise has partnerships with larger, more solid companies
• There is already market feedback: customer reviews, certifications, awards won

DISCOVER ACTIVE PROJECTS

Or discover all the lessons from the "Ultimate Guide to Investing in Equity Crowdfunding".