Start-up and crowdfunding investors should consider five key points before parting with any cash, according to a new guide.
The guide boils down to five rules:
- Never take what you are told about an opportunity at face value
- Always carry out your own research
- Be suspicious if one aspect of a business is heavily promoted ahead of others – it generally means someone is hiding something
- Cross reference financial data and other business information with multiple or independent sources
- Try to meet the business founders face-to-face
“Equity crowdfunding offers investors the chance to back new private companies by buying their shares online and thereby funding them,” says the guide.
How due diligence trapped a fraudster
“It is important to do your research before you invest. Our guide helps investors cover due diligence checks by pointing out what to look for and avoid.”
The guide includes a case study of a medical company that government financial backing and business ties with universities and teaching hospitals.
Looking at the background of the CEO and the company’s crowdfunding campaign manager, the CEO turned out to be a disqualified director serving a seven-year ban.
He had changed his name slightly to make finding his details on the Companies House database harder, but not impossible.
The CEO has appeared in court charged with fraud and the company has expired.
How to check out a company
“Due diligence is more than just a Companies House check and involves looking at all aspects of a business,” says the guide, with a checklist of suggested inquiries, including:
- Checking the directors and company at Companies House
- Investigating the backgrounds of the management team
- Reviewing any trading history
- Testing the credibility of financial projections and their assumptions
- Confirming proposed revenue streams
- Analysing the market
- Inspecting accounts and other official returns
- Looking at what the media and analysts say about the company
- Understanding the exit strategy
“Failing to cover these points leaves investors missing vital information at best and losing an investment at worst,” says the guide.