You, too, can help fuel the American Dream by investing in entrepreneurs whose companies may become the next Spanx or SlideShare. Investment in start-up and growing businesses isn’t just for financial institutions any more. Many people, not just friends and family, want to help entrepreneurs solve problems, innovate, and create jobs.
At the moment, only friends, family, and the wealthy can invest in entrepreneurial undertakings but that’s about to change. New rules in the works as part of Jumpstart Our Business Startups (JOBS) Act will allow others – like you — to become angel investors.
So what guidelines should you follow when taking your first dip in the angel pool?
1.) Do it in a group.
Women may not be inclined to jump in as soon as the JOBS Act opens the pool. “Women may stay on the sidelines until they have a better handle on how to invest in [small businesses] via crowdfunding.” said Julie Weeks, President and CEO of Womenable, which researches and advocates for women entrepreneurship. She suggests that cautious women investors form peer giving circles in which they gather information, seek opinions, and check references as part of a group.
These groups exist for women who are accredited investors. They include ASTIA Angel, a new network, and Golden Seeds, the fourth largest angel network in the US. Both groups invest in women-led companies.
Another organization, Pipeline Fellowship, trains women to be angel investors then invests in women-led socially responsible companies. Of her experience, Holly Lynch, Founder and President of The 85 Percent, which helps launch and grow women-led social enterprises, said that her class benefited from the different perspectives and skills of the individuals in the group, and from sharing the responsibility for due diligence on the venture and the entrepreneur. Particularly nice was acceptance of various levels of knowledge level: No one felt intimidated.
Forming groups to evaluate crowdfunding opportunities could be very appealing to women. “Women love to ask each other for advice,” said Jane P. Newton, Partner and Wealth Advisor at RegentAtlantic Capital, LLC, a company that advises investors. Business associations and chambers of commerce might want to offer opportunities to form crowdfunding learning groups. Or, you could form your own ad hoc group.
2.) Place small bets spread across industries and time.
“The investment decision should be viewed as one with very high risk/maybe high return potential, to some extent like gambling. Investors in these opportunities should first ensure they have a core portfolio designed to meet their long-term goals,” said Newton. “Just as one should diversify one’s core portfolio, one should build a diverse portfolio of crowdfunding investments, knowing some may fail and others may hit the jackpot,” she continued. Diversify across industries and time, investing in companies over a span of time rather than all at once.
“Be prepared to lose your money,” said Lynch. Fifty percent of small businesses fail within their first five years. For Lynch, investing in women entrepreneurs isn’t just about making money, it’s also about being part of a passionate, vitally important community, and learning things that she couldn’t have learned elsewhere.
3.) The leadership team’s experience is key.
The crowdfunding industry is still in its gestation period. Until norms develop for crowdfunding investors, using the best practices of angel investors and venture capitalists makes sense. Evaluate the background and expertise of the management team, not just the potential of the opportunity, said Mary J. Hildebrand, Partner, Lowenstein Sandl, which represents companies that are raising equity financing. Start-ups and growth companies with great ideas but weak management don’t succeed. A good management team increases the chances of success.
4.) Evaluate the crowdfunding platform, too.
It’s not just the entrepreneurial venture you need to check out. “Do your homework on the [crowdfunding] platform,” said Peggy Wallace, Managing Director of Golden Seeds. There’s a stampede of companies launching crowdfunding platforms. You want to make sure that you’re using a reputable one.
The crowdfunding platform plays a critical role in screening companies. Review and compare platforms’ criteria before choosing the one you’ll use. To ensure that platforms adhere to the highest standard, the industry has developed an accreditation program. Using an accredited crowdfunding platform reduces the chances of fraudulent businesses using crowdfunding to bilk would-be investors.
5.) Look to millennials for role models.
“Younger women are really in front of this trend,” said Amy Millman of Springboard Enterprises, which coaches, showcases, and supports women-led growth companies seeking equity investors.
Millennial women may not be able to participate in equity and debt crowdfunding yet, but they are contributing or donating to projects on platforms such as Kickstarter and Indiegogo. They get how to use social media for crowdfunding purposes and will be at the forefront of developing best practices.
To learn more about crowdfunding, check out:
Looking to get in the ground floor of the next The Knot or Constant Contact? How will you prepare?