In our last blog post, we discussed the risk of investing in private companies. Because of these high risks, it is extremely important for you to do a good due diligence.
Now we will discuss the steps you should take to do the due diligence.
Understand the Business
Remember, you are invest in the business, not an attractive product or even just a great idea! If you have expertise in the same industry, you probably could quickly see through the marketing promises and assess the chance of success of this business in the future.
You should look for data about current performance of this business, its assets and liabilities, its funding level and sources. You should also inquire about the company's structure, license, etc.
Understand the Management
You want to see competent management team in place, with skin in the game too! You want to see the management team's business plans, and assess if the business plan is realistic or not.
You also want to investigate if there is any legal issues concerning the business or its management team members.
Understand the Offering
Is the offering legal? Even with JOBS Act, there are still strict regulations on private companies' equity offerings. What's the use of the funds? What rights do you have as an investor? What if anything goes wrong?
If the offering is through a crowdfunding portal, per regulation, there is no assessment available from the listing site, it's simply a channel. But if the listing is at a broker-dealer site, that broker-dealer might perform a certain level of due diligence already and issues an opinion on the offering.
The Bottom Line
It's not easy to earn extraordinary return! By participating a private market investment, you have a chance to strike gold, but also have a chance to lose everything, or hold the bag for a long time to go!
In our next blog post, we will show a list of popular websites for small equity investors and small businesses looking for equity investors.
Now we will discuss the steps you should take to do the due diligence.
Understand the Business
Remember, you are invest in the business, not an attractive product or even just a great idea! If you have expertise in the same industry, you probably could quickly see through the marketing promises and assess the chance of success of this business in the future.
You should look for data about current performance of this business, its assets and liabilities, its funding level and sources. You should also inquire about the company's structure, license, etc.
Understand the Management
You want to see competent management team in place, with skin in the game too! You want to see the management team's business plans, and assess if the business plan is realistic or not.
You also want to investigate if there is any legal issues concerning the business or its management team members.
Understand the Offering
Is the offering legal? Even with JOBS Act, there are still strict regulations on private companies' equity offerings. What's the use of the funds? What rights do you have as an investor? What if anything goes wrong?
If the offering is through a crowdfunding portal, per regulation, there is no assessment available from the listing site, it's simply a channel. But if the listing is at a broker-dealer site, that broker-dealer might perform a certain level of due diligence already and issues an opinion on the offering.
The Bottom Line
It's not easy to earn extraordinary return! By participating a private market investment, you have a chance to strike gold, but also have a chance to lose everything, or hold the bag for a long time to go!
In our next blog post, we will show a list of popular websites for small equity investors and small businesses looking for equity investors.
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