5 Tips For Evaluating Crowdfund Investments

Alex Thaler is an entrepreneur who saw a problem and immediately saw a solution. Ordinary investors are now allowed to invest in startups and other private issuers via crowdfunding portals, but need help. He created Stratifund to solve the problem. Today, he offers five free tips for evaluating crowdfund investments.

Thaler, with an MBA from Wharton and experience with Life Time Fitness and Boston Consulting Group , says that Stratifund was formed in 2015 and just started operations coincident with the effective date for Regulation Crowdfunding (JOBS Act Title III) investing last month. The revenue model is a monthly subscription that costs participants just $10 per month. As the first revenues are just being recorded, he says he can't yet measure margins meaningfully.

He approaches the crowdfunding market with a sense of mission and purpose. He says, "Our mission is to drive the equity crowdfunding business." He sees transparency lacking in the space and hopes to be the one to address it.

Crowdfunding enthusiasts, like me, have long argued that crowdfunding itself is a form of social entrepreneurship, breaking down traditional barriers to capital for women and minorities who have been largely boxed out of the venture capital market.

Stratifund not only provides thorough analytical reports on every Regulation Crowdfunding offering the firm aggregates deals from across all of the portals so investors can come to one place and see everything.

Thaler has been living in a world that didn't exist, developing templates and models for evaluation crowdfund investments. As such, in many ways he is ahead of the rest of us on figuring out how to evaluate a possible investment in Regulation CF deal. Here are his five points:

1. Look at the team. He says, "Invest in a rock star team." Experienced investors understand that it is better to bet on an "A team" with a "B idea" than a "B team" with an "A idea." He adds, "You want the team with the right skill set to drive the company to success."
2. Look for a large, growing industry. "You want a piece of a big pie," he says. There is more potential for growth with a unique idea and a big market. He frets that too many people invest based on recommendations from family and friends without understanding. He cautions that investors need to look at the narrowly defined industry and not the industry as a whole. That is, if you are looking at a company that makes athletic socks, look at that market niche, not the entire apparel industry to gauge the market size.
3. Check the depth of the competition's pockets. Investors need to understand whether the company is competing with the shop on the corner or with behemoths like Apple and Google . It will take much more capital, he cautions, to compete with the big boys. For example, he says, "take competing with Amazon. Right now Jet.com is trying to launch a competitive service. They have raised over $500 million to date. Compare this with opening a restaurant at the corner of a popular street in your town. The cost is much lower and with so many small competitors its easier to get your name out with a more modest marketing budget."
4. Look for a company doing something unique. The challenge here is to find evidence that the market perceives a value difference. A Kickstarter campaign that successfully exceeded its goal and raised a lot of money could be evidence that the company has found a way to differentiate itself from the crowd. The key question, Thaler says, is "Do we have a change customers are willing to pay for?"

1. Look at the numbers. You've got to get into the financials, he says. While it is easy to make projections and to get Excel to say what you want, you should be able to see if the plan lines up with the projections. If the first four tests don't measure up, don't let rosy financial projections sway you. On the other hand, if everything else looks good, make sure the numbers also look good. Be sure to check the "cap table," the capitalization of the company and who owns what with what rights after the deal closes. Be careful about investing immediately after a venture round, he cautions, when sophisticated investors may have locked up special rights and privileges with preferred stock and then may offer you common stock--worth much less--at the same or similar price.

On Thursday, June 2, 2016 at 4:00 Eastern, Thaler will join me for a live discussion about his five tips and the new platform he's launched to support the nascent equity crowdfunding industry. Tune in here then to watch the interview live. Post questions in the comments below or tweet questions before the interview to @devindthorpe.

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