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How to Identify a Potential Equity Crowdfunding (ECF) Success?

Congratulations! You’ve decided to venture into the exciting new world of equity crowdfunding (ECF) and are now on the lookout for potential businesses that could potentially deliver a huge return on your investment. It should be easy right? Unfortunately, it’s not quite that simple.

If it were as easy as monitoring the NASDAQ index or checking the Alibaba share price to decide whether to buy or sell, more people would be putting their money in. Like all investments, there are no sure-fire bets although there are some key factors that can indicate growth potential and possible success. Here’s a few things to look out for before investing:

Revenue

This is the number one factor that sharks and dragons on those popular business reality shows look out for before investing in a company. Revenue is the most basic form of feedback that a market can give a business – if there’s no interest in the product or service, there will be no revenue! Look out for revenue data from the company you’re planning to invest in. If there’s multiple years of data, read it all to see if you can identify patterns in the revenue stream. Is it continually growing? Can lower revenue in a particular year be attributed to forces beyond the company’s control?

Revenue is a key figure that can show whether a business is on track to grow further or if it’s in decline. If there is a strong pattern of growth over several years, this indicates that the company is gaining more and more customers, and vice versa if the pattern is going the other way! Don’t just look at profits – even unicorns like Uber aren’t there yet!

User base

This is another key factor that should be taken into account before investing in a company. The number of customers highlights not just the popularity of a business, but also the potential for a repeat sale. For example, Amazon Prime has a user base of over 100 million and growing in the United States alone, which is a huge potential market to target with products and services.

A growing user base offers the same feedback as growing revenue – it indicates that consumers enjoy the product or service and are either returning or introducing more customers to the business. Similarly, numbers that are declining or stagnant suggests that a business may either be dropping in quality or have run out of ideas. Not a good look for potential investors!

Founders

If you’re interested in backing a company through equity crowdfunding, it’s probably a good idea to look up what its founders have done in the past. While past failures and successes do not guarantee similar results in the future, you’d probably be much more at ease investing in a company where the boss has been there and done that!

Generally speaking, companies that aim to raise funds via ECF are more mature startups and have either a proven track record or a proven product/service and demand. This can be traced back to the founders and how they run the company as a whole. When researching a company, if a founder has an established track record of success, it’s a good sign of credibility as they are very likely either subject matter experts or thought leaders in their field or industry. 

This is their unique selling point, in that they are likely to have an edge over competitors thanks to their track record. In such a case, funds raised via ECF is likely to be used not just to expand their business, but to pioneer more advanced products/services or to advance the industry as a whole. Think of companies with the potential to disrupt existing industries to create a whole new giant such as Uber or Airbnb. These are the kinds of founders you want to invest in.

Serial entrepreneurs may wear that badge with pride, but only a select few can call themselves successful. After all, who wants to invest in a company with a founder that has a track record of helming failing businesses? Past accomplishments demonstrate that founder(s) have the relevant skill set to build a successful business repeatedly, which is a key ingredient to any startup. For example, if Jack Ma, the former Alibaba chairman, wanted to start another business, you can bet your bottom dollar he wouldn’t have any shortage of offers from ultra-high net worth investors around the world.

Should You Invest in ECF?

Ultimately, there is no guarantee that the business you invest in will provide a return on your investment, even if you’ve done as much research as possible. External factors like the economy can have an adverse effect on a business no matter how strong the foundations are.

Similarly, the most accomplished founder may finally hit an obstacle too big to overcome. However, considering the factors listed above will give you a solid base to make a well-informed decision that will put you in the best possible position to succeed as an equity crowdfunding investor.

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Disclaimer: Our articles are not and should not be taken as financial advice. You should conduct your own research carefully and be fully aware of all implications prior to making any investments.