Investment Banking 101 - How to Evaluate a Crowdfund Opportunity | John Colley | Skillshare

Investment Banking 101 - How to Evaluate a Crowdfund Opportunity

John Colley, Digital Entrepreneurship

Investment Banking 101 - How to Evaluate a Crowdfund Opportunity

John Colley, Digital Entrepreneurship

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16 Lessons (45m)
    • 1. How to Evaluate a Crowdfund Opportunity Udemy

    • 2. 1 Key Information

    • 3. 2 Business Summary

    • 4. 3 Financial Summary

    • 5. 4 Managment Skills

    • 6. 5 Management Experience

    • 7. 6 Management Commitment

    • 8. 7 Product Market

    • 9. 8 Product USP

    • 10. 9 Product Competition

    • 11. 10 Product Traction

    • 12. 11 Investment Profitability

    • 13. 12 Investment Cash Flow

    • 14. 13 Investment Returns

    • 15. 14 Bonus Create a Methodology

    • 16. 10 Keys to Evaluating a Crowdfund

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About This Class

How to Evaluate a Crowdfunding Opportunity


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This introduces the course which is going to look at how you can evaluate a Crowdfunding opportunity

Key Information

Before we get into specifics, there is some basic data which you will need to know for every Crowdfund and we cover it in this lecture.

Business Summary

Every company pitch page will include a summary of its business and from this you need to understand the basics of what the company does, its product, customers and market. This will be supported by other information but this is your starting point.

Financial Summary

The financial summary is your first opportunity to evaluate the numbers behind the business.  This is useful for a first view of the potential value of the business and the opportunity.  If you are not equity crowdfunding, this is section is helpful (if provided) to enable you to form a view of the likelihood that the product you are supporting will be delivered.

Management Skills

The management are the team who are going to deliver your product or, in the case of an equity crowdfunding, the return on your investment so you had better take a close look at their skills.

Management Experience

Its good to see a track record both in business and in fund raising when you look at your Management team, so bear these points in mind.

Management Commitment

You want your Management team to be committed to the business - take a look at what they have put in time-wise and in terms of money.  Who benefits from the Option pool.  These are the guys who are going to deliver for you and you want to know that they are going to stay the course.

Product Market

The Product's market is a vital component of the equation and we need to understand this background to the context in which the product will be sold and will compete with other products in the same or similar markets.

Product USP

To be successful you want to see a product with some unique characteristics which will enable it to compete successfully in its market and make it difficult for its competitors to copy.

Product Competition

You need to take a close look at the competition the product is facing and understand this aspect of its market. Put the product in this context to understand its chances of being successful.

Product Traction

Traction - the extent to which the product is finding customers in the market is extremely important but is dependent on the stage of development of the business.

Investment Profitability

A good understanding of profitability is the key to understanding whether your investment is going to be a success, particularly in equity crowdfunding. You want to invest in a company that is going to be very profitable down the line because that is what will make it valuable to an acquirer or a market and provide you with your exit.

Investment Cash Flow

Understanding the Cash Flow of an investment is critical and no more so than in a Crowdfunding. Whether your opportunity is rewards based or equity, you need to have a grasp of how much cash is being raised, what for and how long it will last.

Investment Returns

We bring this analysis together by summarising what the opportunity means for your potential investment returns.  

You need to consider a number of factors in this evaluation which are explained in this lecture.

Create a Methodology

This lecture explains how you can turn this framework into a methodology for evaluating Crowdfunding Investment Opportunities.

There is a Score Sheet Excel Spreadsheet attached with the Course project to aid you in this.

Summary - 10 Keys to Evaluating a Crowdfunding Opportunity

This summarises the 10 most important factors in the evaluation of a Crowdfunding investment opportunity.

A Copy of the slide decks for all these lectures are attached with the Course description


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I hope you enjoy the course!

See you Inside

Best regards


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1. How to Evaluate a Crowdfund Opportunity Udemy: Welcome to the Siris on how to evaluate a crowdfunding opportunity. The key question is, are you interested in crowdfunding? Is this something either as an investor or as a potential crowd funder that you want to do ? Is this something you are interested to learn more about? Because if it is, then I've got just what you need. The real challenge is actually, whether you're investing or whether you're actually a crowdfunding yourself is how do you tell one opportunity from a number i e How do you spot the good ones? Or how do you present your business in the best possible light on? That is what this series is going to be all about. I've created a 13 part series. I'm going to show you and take you through step by step criteria. You need to have value evaluate crowdfunding opportunities. But please note this is not financial advice. If you want to discover more, you can download my free introduction to crowdfunding checklist. So I will see you very soon in the first off the 13 part series 2. 1 Key Information: I want to take a look at the key information that you need to know about any crowd funding opportunity. The first question to ask is, What platform is the crowdfunding opportunity on? So which platform have they gone, too? And this will obviously depend whether it's a rewards based, a donation based, a pit peer lending based for indeed, an equity based crowdfunding. Then you want to understand the stage that the business is at in some of the rewards crowdfunding campaigns. The company has only got a prototype. If you go to equity crowdfunding campaigns, they tend to be somewhat more developed, and they actually have a product. So instead of being at the stage where the product is being proven, these companies are really looking for expansion capital, and it's really important to understand the stage. The business is that understand to where the company is located now it doesn't stop you from investing internationally, but it can have repercussions for your ability to cut, to take a budget of tax breaks. And it also has a an impact on whether you actually want to go and see the company to visit them. And obviously if they're in California and you're in London, that's going to be difficult. Check the date that the campaign is due to start or has started. Because these campaigns typically run for 30 days on, you need to understand how much time you've got to make a decision. Very important. One stand toothy amount off the race. How much money are they trying to raise on? You're therefore, get some idea, particularly if the campaigns already started at how successful that being, because you'll also be able to see how much money they've raised up to that point. Andi allied with that? What percentage off the equity if it is an equity crowdfunding is being offered on? If it's not, it is just a rewards based craft. And then, actually, it's just a question of the targets on how close they're getting to them going back to the equity while no, however, do understand the valuation on which the crowdfunding campaign has Bean launched because that will give you an idea as to whether it's a very high valuation and therefore it's a very aggressively positioned or whether it's a very reasonable valuation. So you get that number, it will be very helpful to you. And finally check to see if you can get any tax breaks, whether you're in the U. S or in the U. K. Or in Europe, wherever it happens to be. Do you have the opportunity to shelter some of this investment under your own tax returns? So there's just some of the key points you need to understand on its the starting point, if you like. For every crowdfunding evaluation. If you'd like to pick up my free introduction to crowdfunding checklist, then just go to the link on the screen. JB de Cali dot com forward slash crowdfunding on I will see you in the next video. 3. 2 Business Summary: every crowd funding opportunity will have a summary off its business, and that's what we're gonna take a look at now. You should get two or three paragraphs at least describing what the business does on these are the points that you really want to be looking at. First of all, understand what stage the business is at. Very often, these companies are start ups, particularly there in rewards crowdfunding programs. But they may also be more development math, and they may actually be in the expansion stage. And, classically, the SAGES go from. So start up, you get a prototype product. They sell that product with customers, so they prove the product has got some value. Then they prove they consented to several customers once they've done that, then there into an expansion mode because they prove that there's a market for their product. So you get this evolution, and you really need to understand where the business is positioned. Then take a good look at the product. What is this product all about? What's exciting about it, what's sexy about it, what's unique about it? Is this a product? If you were the right customer, is this a product you would find attractive to buy. Does it resonate with you on? It really needs to have something special about it. If it's gonna be successful not only as a crowd funding opportunity but also as a business opportunity, then take a look and see which customers the company is trying to address. Who is going to be buying this product on? Why are they going to be buying it, then understand what the channels to market out? How is the company going to sell their products to their customers? Are they're going to sell it direct? Are they going to sell it online? Are they're going to sell it through distribution? Are they going to sell it through a hybrid model? A group, a range of of all of these. And you need to understand the costs associated with that because even when they're selling it direct, they may discount. If they're selling its distribution, they have toe obviously share some of the prophet with the distributor, so just depending on how they get to market will depend on how successful business is going to be. Then take a look at the competition. How difficult, How tough is that competition. And if you've got one or two very, very large competitors, so provide that same something, you're gonna producer a digital watch and you're in the market up against Apple. Ouch. Okay, that's a really big ask. Although having said that, of course, the pebble was very successful on Kickstarter, and that was a digital watch. But actually that came out before the I watch came out. So you need to look very carefully at who your product is going to be. Going up against scalability in these businesses is vital because if you're investing particularly you're investing in an equity crowdfunding and you're gonna part own the company. You want to know that this company can grow very large. And if it's a product based company which has got great manufacturing, it's easily to manufacture that. You know, it's a software business, then scalability is great. It's of people based business, scared abilities more difficult, so really understand how the business is going to scale. And then you need to understand the margins the company is going to work on burying mind you've got with Price. You then got the gross margin. You've then got the net margin on. You've also got to ask yourself, How much are they going to actually have to discount their product in order to get it to market? So is the company selling be to be or is it selling B two C? Is it selling toe predominantly enterprise and business customers, or is it selling to the man in the street? The consumer, on depending on how that works will depend on, will impact the length of sales cycle. And it will also impact the ability to sell large numbers off products. Because if you're doing a B two B sales very often, you can sell multiple units at, but your sales cycle is much longer. If you're saying Peter see, then you're gonna have to sell smaller numbers of units toe lots more people that they often the sales cycles much faster. And, of course, all this is allied into understanding how much traction company has got. How many customers have they actually got now? So have they proven that they can sell this thing and have a proven that their customers for it? So those are the sorts of things you should be trying to extract when you read the business summary. And if you can understand and grasp really what the company is doing, what the product is and how it's doing it, then that is a very good start. 4. 3 Financial Summary: Let's take a look now at the financial summary. The information provided in this summary format is likely to be a digest off the profit and loss account the balance sheet on the cash flow. And you need to understand how these work together because any business must have an integrative model, which allows you to see the impacts off. What happens in the PML account impacting the balance sheet and then resulting in the subsequent cash flow on all these strings are inextricably linked. Some of things you should be looking out for are the margins that the company makes. Take a look and understand its fixed costs, which are normally through the costs not only off production but also off the people in the business. Or indeed, the are, you know, the premises and that sort of thing. And then you have the variable costs, such as marketing basically covered under SGN cells, a general administration. So you need to understand what the financial structure off the business looks like on in order to understand its profitability and how successful it's likely to be. I understand from the top of the P and l account down, you know What sales is the company making? What sales are? Is the company forecasting to make down the road? And are those forecasts realistic? Are they achievable? Are you looking at some amazing hockey stick or is it actually a much more realistic and achievable target? And evaluating forecast is always a bit of a finger in the wind exercise. But after you've looked at a number of them, you'll soon see if the concede that company's been around for 18 months and it sold six units and IT records is going to sell 106 units in the following month that that is probably on over optimistic forecast. Understand to the time frame, you need to look out. Typically, these forecast go out for five years, and it maybe that's a sort of time. Fame. You need to look at toe, hold this investment before you're going to get a chance to exit it. So really understand the time frame in the likelihood off on exit at some point, but against the progress the company is likely to make. So you do need Teoh go in this into this with your eyes wide open. So what sort of exit do you think this company is going to achieve on? If you look at the forecast, you put a multiple on the operating profit. So you know the D a off the company in five years time, or maybe 5 to 6, then it'll give you some idea of the opportunity exit. And of course, you need to understand how smaller piece of the company you're gonna own at that point. But also look at the company in the light off other opportunities that this is the way you're you're looking at it as an exit on. You're going to see well against other companies. How is this one gonna fair? This is part of the purpose. But doing this exercise, but think as well who is likely to buy the company? Is it going to be a competitive? Is it going to be a financial investor? Is the company goto aipo so that there must be some clear thought gone into how the shareholders are going to be able to realize their investment? And of course, this all ties into the valuation they're asking for the business today. And of course, the valuation expectation is down the road as well So if you have these things on your checklist to understand, then you are going to be getting an awful lot out of this financial section. So this is some of the points. These are some of the points you need to address when you're looking at the financial summary. 5. 4 Managment Skills: Let's turn our attention now to the management on What you need to do is to look across the whole off the documentation that's available to you on form this view about the management . And in this particular case, we're gonna look at management skills, the first point to start with any crowd funding opportunity. Indeed, any early stage company is to have a look and see who the co founders are now. Typically, you get 123 maybe four co founders on. If there's only one founder in the business, then I would be slightly worried because it does suggest that there is going to be a knish you with the skills gap in the business. But typically, if you get a founder, you may have ah, cto, a technical guy who's doing a lot of the coding you may have a sales and marketing guy on. They will have complimentary skills on That is a good and positive thing, and you also wanna have a look, then around the other people in the management team to see how they complement the founders . The age off the management team is actually very important as well. Now I'm all in favour off these bright young guys and girls coming up on starting these amazing, innovative, disruptive businesses. That's fantastic, but I would be concerned if everybody in the business was under the age of 22. I do like to see a at least some experience in the management line out lineup on in in an executive role, not just necessarily as a chairman or a non executive director. So the age range off these people is actually quite important and then take a look at their roles and see how they complement each other and see how they work together. Because you really are looking for a cohesive unit now allied to that. Take a look at their previous business experience and skills. What have they done before this point? Have they raised money? Have they actually done or had jobs or had activities, or being study university on bean achieving things which complimented what they're trying to do now? Because if it's their first start up, then there is a higher risk associated with that. And again, it's absolutely fine for people to fail, but you don't really want to be having to fund that failure much mothers. Frankly, somebody else did. So when you look at their skills, try to identify where the skills gaps exist on again. It's perfectly acceptable to have a gap in an early stage company providing the management understand there's a gap and they have plans to fill it. So evaluating the skills of the management team because these are the people who are gonna execute for you is really important. And those are some off the key points you need to look at when you are evaluating management skills. 6. 5 Management Experience: Let's take a look now at the management experience, and this is clearly different to the management skills. What you're looking for is to actually see what experienced team have got that is relevant to the business they are in today. So have they bean a CEO before have they Bean finance chief before have they bean in sales and marketing roles? And you want to understand You know what they've done and how well they've done it. Indeed, you also would like to know how pay raise money before, because that's also important. Now, really, what you're looking for here is a balance. You're looking for the bright, innovative young guys, but you're also looking for somebody with a bit of gray hair who's got a bit of experience being around the block a few times. And I'm not just saying that because that's the sort of person I am. But actually having that depth of experience is really important. As I've already said, Fundraising experience is also very important because you would like to know that at least somebody on the team has bean through a fund raise before, so they know about all the complexities on the details on the difficulties and the tight timetables, and they understand the importance off momentum. And they understand the importance of getting anchor investors or getting a crowd behind them before they launch. All these complexities are not going to be new to the team. And if they have that fundraising experience, then you were a much better chance that one. The crowd fund will succeed. But much more importantly, that beyond the crowdfunding, the product will either be delivered. Or indeed, the business will go on to success. So definitely expect to see some experience in that management team. And if they are all completely newbies, then you realize your risk level has just gone off. It may not stop you from making this investment because you are so blown away, either by the individuals or your blown away by the cause or the passion behind it or the story. Or, indeed, just simply, you think it's an amazing product. But going with your eyes open and take a very good look at the experience that management team has got. So they want. That's all about the management experience, very important factor. But you don't need to necessarily cancel everything if they're all brand new, because after all, we all have to start somewhere 7. 6 Management Commitment: I want to talk to you now about management commitment, because this is really important to this successful failure off the business. Now it's the old adage in the egg and bacon breakfast. Who is more committed? Chicken all the pig. I'll leave you to draw your own conclusions, but the real point is how much skin these guys have in the gang. By that, I mean, how much? Not just money have they put in, but how much sweat equity have they put him because it's perfectly OK for them to work for a long period for nothing. That is commitment just as much as somebody coming in and investing a load of money. The flip side of that is to see how much money they're taking out very often ended. In early stage companies, the founders will work for next to nothing. Now, not everybody obviously can afford to do that. So it is acceptable to see money going out the business because people have families and they have mortgages and things. But you don't want to see massive salaries going out at an early stage, so there has to be a balance between the commitment to the business on the rewards they're getting at a very early stage. The question really to ask yourself is, how lean is the business, How much cash are they burning and how much cash they burning on themselves? Because if they're perfectly acceptably hiring developers and hiring people to do the work , no problem. If they're furnishing themselves with Mercedes motorcars, then you should be asking questions and at a very early stage, so sweat equity, when people work for nothing for a long period of time. That's great if they're getting options. That's good, too, because they then have something to lose. And typically you expect to see about 10 to 15% off the equity committed to an option pool , to keep people particularly important people in the business and to see them motivated. But what you really want to understand is that the team who are committed to delivering are committed and they're not going to go off and do something else. If that takes their fancy. So you want to see this commitment, you want to see this commitment in the time they put in the business in the money they put into the business and also you want to see them potentially rewarded with some options, which gives them a lock in on. If you can see those things, then you know that you've got a management team who are committed to the business, and that's a really important factor. And you can take that, I thought, and extend it to other key non management team members off the business. You want to see the key people who are gonna deliver properly committed. 8. 7 Product Market: Now it's time to turn our attention to the product on the first aspect off this we want to address is the market that the product is targeted at the key. First question is, you know who is the customer? Who is going to be buying this product? We discussed whether it be to be your B two c. Is it a business? Is it consumer that there needs to be a very clearly focused target customer to whom the product is addressed on? The business needs to be very clear about who that is. If the business does not have an avatar on a very clear structure and image on characterization, who their customer is, they probably haven't thought it through enough. So if that's the microcosm of the market, then the next thing is to say what? How many people are there in this market? So how big is the market? And really, if you're looking at companies that the seas were found, they will nearly always want to see a multi multi £1,000,000 if not a £1,000,000,000 market because unless they see a market that size, it's very difficult to see how their business could scale. Whilst you may have slightly smaller ambitions, you definitely want to see the company addressing a very large market. Or be it may be a niche market, but it may be an international market. However you describe it, they want to be able to understand what it is and you don't want them turning around to you and saying, Oh, by the way, we know this is a $1,000,000,000 market, So all we need to do is get 10% of it and will be £100 million company. That sort of top down analysis and thinking does not work. It needs to be bottom up, starting with the individual customer. But you need to understand what the concentration of competitors is in that market. What does the market look like when you start taking into account the other people who are providing on producing similar products? Because if it's a very fragmented market, there'll be less competition and therefore more opportunity for your company to succeed. Take a look and see how wide this market can go. Is it a regional is in the local market or, indeed, visit a national rented an international market. You know the you don't have to start exporting on Day one, but it's jolly good to know that once you've actually got yourself established in your domestic market, then you can go overseas. Of course, that is not without risk on the final thing you really understand is how fast is this market growing? Because if you've got a relatively early stage company with an innovative or disruptive product, then you do want to see the market itself expanding as well as the company growing into the market. So try to find out what the growth characteristics off the market are. So they were there some aspects off the market that you need to understand so that you can put the product in the context in which it is going to be sold and in which it will compete . 9. 8 Product USP: Let's take a look now at the product you SP on by that we mean unique selling points. The starting point for this, conceptually, is what is the problem or the pain that the product Solt. So for every good product, somebody has a need they wanted and they will buy the product because it addresses their problem or it relieves pain. This is also the key, of course, to good marketing, but in terms of your product, you need to be able to identify what it does and be very clear that you can address the people who are suffering that problem and pain, and it needs to do it in a unique way. It needs to do it better than the previous one, and it's not good enough just to be a better mousetrap. It actually needs to have some unique characteristics which is going which are going to incentivise the potential customers to go out and buy the thing in the first place. So unique selling points are what you're looking for. What is it that's so special about this new product that's going to disrupt the market and have lots of people rushing to buy it? instead of buying the things that they can buy in the market at the present time course, no product is totally unique, but it may be that it is a real breakthrough product and it's very exciting. But you do want to understand really what is special about it, because no product is totally unique. Every product is, to a certain degree and evolution off something that has gone before now a good way off, checking on this and a good way off assuring yourself that the quality of this product is such that it has something special about it is look for the patterns. Have they got patterns which protects some of the unique characteristics off the business? Because if they have a pattern, tells you they're doing something new, they're doing something that somebody else has not done before, and that's really helpful. Perfectly acceptable to have patterns paying pending much better toe have patents granted, and ideally, you want, as as global a patent base as you can get because you have people Justus quickly copying your ideas in China if you're in the UK as anywhere else, So another aspect. Look at this hour another way to look at this is in terms of barriers to entry. What does this product have that makes it difficult for other people to come in and compete against it? Now it may be the sophistication off the technology. It may be the cost of the manufacturing. It may be something unique about the software. Whatever it is it wants toe have some aspects to it which make it difficult to for other people to compete against. So you're looking here for uniqueness. You're looking here for something special on if that product is just another me too product and all they're going to do is to compete on price, then that can be a really major red flag. 10. 9 Product Competition: Now let's turn our attention to the competition because every product has competitors. The basis on which the business competes is really important. Is it purely competing on price, in which case you've got a discounting product which is never going to actually stand out? Or is it such a niche product that actually it can compete and set its own price and compete on its own characteristics? So you need to understand how it's competing, and you need to understand who is competing against. Ideally, you want to see a nice fragment in market with lots of competitors. If you have a few very large consolidated competitors who have very significant market share, they will be able to sustain quite a lot of losses and financial attrition in order to try to force you out off the market. And you need to understand the structure and the nature of that competition before you go into it. And you need to understand what your product in the case of the crowdfunding opportunity, what this product is up against on what the competition looks like. Of course, you also want to see the opportunity for disruption. This is where products can really take a bass significant market share because they very quickly dislodge established competitors on established themselves as the market leader or not the market leader that maybe the number two or three. So does the product that you're backing have that disruptive capability? Does it have the possibility of going into its market on everybody flocking to it because it is so much better, so much more indicative than the products that have gone before. You want to understand as well the relative market power around the product that you're looking at really thinking about Porter's Five forces here, where you basically have the power off suppliers, you have the power off the customer and you have the power off competitors on the power off potential new entrance. And you need to understand the forces around your product to decide whether or not it's going to be in a market where it has a fair chance off competing successfully. So getting a grip off the competitive nature off the market and the competition that your product is facing is absolutely critical 11. 10 Product Traction: Now let's talk traction on what we mean by this, is is the product selling in its market? Has it got some momentum and some existing customers who are already sharing their interest in the business? Now, of course, this does depend on the stage off the business we are looking at. If this is a very early stage business on, they've only got a prototype. It is unreasonable to expect the company to have much traction. However, there are stages which companies go through, and if you understand this stage progression, then you'll be able to evaluate whether or not the company is being successful. So once you've got the prototype made and you've got a product you can sell to a customer, is there a demand for that product? Can they sell it toe? One customer on that gives you product proof. If you can then sell it to a cluster of customers, then you're sharing that there's a market out there, and that's market proof on. Then once you've established that you have a cluster of customers, then you can move into expansion mode to sell it much more widely. So if you have a very real estate company don't expect much traction, but if they haven't existing product, which has been around for a little bit, you definitely want to see evidence that people are out there on buying it. So the question then comes back to who are the customers and you know what sales have bean achieved to date, and you then want to look forward and see what sales they believe they can get going forward. And, of course, with customers you're looking at to see whether that be to be that business customers were that be to see that consumers and understanding the mix because it can think it's very possible that the product can be sold to both of them, So you need to understand more about the customers. You need to understand that the customers are buying the product and you know that there is potential there for the company to really establish itself in the market. And you want to see that at an early stage because if the company is struggling to get sales, then that's a sure sign that there may be problems coming up in the future. And if they're doing a crowd fund to raise money for marketing because they can't sell any of the product. But they've been trying to sell the product for a while, then that could be some course to concern, and you need to be aware of that. So that is product traction. It's an important aspect off the whole sales process. It's an important aspect of the evolution of the business, and it's something you definitely need to pay attention to. 12. 11 Investment Profitability: Let's turn our attention now to the investment, and I want to start off with the profitability of the company, and this is really focused more on equity crowdfunding than on rewards based crowdfunding. You want to start off by looking at the unit price that company is charging for its product or products on the extent to which it is discounting in order to get those products off the shelf and into customers hands, because this will directly impact the margins that the company is achieving, both at the gross level on at the Net. And you need to look at this quite carefully. To really understand bottom are how the company makes its money because this is the core of its profitability. And then you want to understand the extent to which sales are growing because you want to get some idea off what the recent past is because that's the best indicator to evaluate whether or not the forecasts are going to be accurate. I'll never be accurate, but they may be realistic, and you want to make sure that there at least some indicator. What you might expect will happen in the near future is the company discounting in order to shift his products. Now this could indicate that the product is in there very competitive market or the company is simply struggling to sell. And you really must understand if you can find out from the company exactly whether they're achieving their recommended price. They're part of whether they're having to discount it. To get it, you need to think of the profitability of the company as well in terms off the timeframe not only of the time frame that the company has existed to date, but at the time frame of the forecast going forward and the time it's gonna take for the company itself to become profitable. And that may be several years. And this is the core to this whole area of crowdfunding that you are looking at quite extended time frames, and you are in quite an in liquid. The scalability off the business is off course, the key to growth. And it may also be the key to profitability, because if you can produce lots more units off product very easily as you can, for instance, with software as opposed to a manufacturer item, then the profitability of your business is going to be that much greater on their four value off business will be that. So spend some time really tried to understand the property loss account on the profitability off the business because this is the core off, the profitability off the investment you're going to be going into. And if the business is profitable on the investment is profitable, then over a period of time, your returns will reflect that level of profitability. 13. 12 Investment Cash Flow: Let's take a look now at cash flow because this really is the crux of every investment. The starting point is, how much money do they want to raise on? This may be both for a reward spacecraft fund or, indeed, an equity based crowdfunding. How much money are they actually trying to raise? You'll need to understand what they need to apply that money to, because that would be relevant to how the cash is used. But what you really want to know is how desperate they are for the money. Now, in a rewards based crowd fund, you normally expect that they can't produce the prototypes into products without the funding. That's fine, and you get that in an equity based crowdfunding, however, you are facing a situation where the company is more established, it has a burn, and it needs to raise the capital to keep going. So what you need to really be asking yourself is, does the company need the money now? Does it need it in a month or two, or does it need it in maybe six months? And they're really aiming ahead? The rule of thumb for any fundraise is that you really should be trying to raise enough money for 18 months. And you should really start raising money when you got at least six months money left. Because it's probably going to take that long to raise the next batch of money and then is called Runway. How much cash they got in the bank to actually last, Um, for how long? And if you understand the desperation, then you'll get some idea off the state of the company and the likely success off the crowd . The calculation that you need to understand is the cash burn. How much money is this company going through on a monthly basis? And you quite like to know what it's spending it on as well? At some point, the company will become cash positive. And you'd very much like to know when they're forecasting to do that, because when you understand how much money they're raising on where they're going to be cash positive and what the burn is, you'll understand whether they're raising enough money to get them to cash positive, or whether there's gonna have to be a subsequent cash raise in order to get them to that point, or even 1/3 1 So understanding these things, understanding how the cash flows are working is absolutely critical. And of course, you need to look at the forecast to that. And you need to make take a judgment yourself on whether you think these forecasts are realistic. So cash is king. Cash flow is at the heart of this, and you really need to understand how it's all going to work. 14. 13 Investment Returns: now I want to talk to you about investment returns on this, of course, is particularly Jermaine to equity crowdfunding on the starting point for that is what is the valuation off the business that you are being asked to investigate and therefore what percentage equity is available in this raise given the amount of money the company is trying to put together, because this will give you an idea as to how highly valued your business is on it over course depends on thesis eyes and stage on the whole characteristics, the business. So there is no one size fits all on this. But suffice it to say, if you're doing a crowdfunding on the valuation is under £5 million on their say raising a 1,000,000 then you know you you're in a sort of sensible ballpark. If they're raising a 1,000,000 they're putting a 50 million valuation on it, that's pretty aggressive. So you really do need to understand where the valuation is on how much equities being offered this or ties into pre emption rights. Because don't going down the road. As there are subsequent rounds, you will have the opportunity to continue to invest in the business and maintain your percentage share. And if you don't do that, you suffer what is called dilution, so you'll still have the same number of shares. But because there'll be many more shares out there, your percentage off the pie, even if the pies getting bigger, your part your share of the pie will actually be getting smaller. And you need to understand how all these things work together as part off the whole package that you're investing in on. This, of course, depends on how many future rounds there are likely to be, and indeed the exit valuation. So how much do the owners of the business currently think they will get for the business in three or five or seven years time? And that, of course, is the valuation that you will share it on. That will be the number that creates the multiple off return on your investment. So it's a really critical number to try to understand, and you can look at examples of similar companies and similar products that have always been sold. But inevitably, there is the element off being in the right time at the right, being at the right place at the right time about this and talking about time that brings me on to time scales. You have to understand this is a long term investment. This is a 357 even 10 year investment on that will have an impact on your return because off the time value of money. So you need to spend some time now understanding how your returns are likely to be, how they like to come about over time and the return you're likely to make on your investment. And those are some of the variables that you need Teoh grasp and understand if you're going to get some handle on this important issue. 15. 14 Bonus Create a Methodology: now, Finally, after all that, I've got a little bonus for you. 1/14 part to this Siris on what it's all about is creating a methodology. I've given you a whole Siri's off important keys on factors that you can use to evaluate a crowd fund opportunity. Now, what you can do with these is every time you look at a crowdfunding opportunity for each of these aspects, you want to score them 1 to 10 1 being low 10 being excellent on, then taken average across the investment to get a percentage, then off where this particular opportunity or that particular opportunity stands against some of the others you've looked at. So this becomes a scoring methodology that you can use to comparatively evaluate to compare different opportunities, and you'll be able to see the strengths and the weaknesses in the different aspects off the opportunities, as well as get an overall score on this comparative methodology. The strength of this means that you can start to make objective assessments off opportunities, compare them one to another and decide which of which of the opportunities that are in front of you, you think are the most attractive and There's a lot of strength in this because you turn what is a highly subjective exercise into a really object of exercise on. This truly allows you to evaluate the opportunities in front of you. Now I stress nothing in this course is about financial advice. It's all about structure framework on techniques to make you a stronger investor to make you and more objective evaluator off crowdfunding opportunities. So go ahead, apply that methodology and you'll actually have something very powerful, which will enable you to not only come to a conclusion about the opportunity in front of you, but to compare it with the others that you are also looking at at the same or a similar time frame. 16. 10 Keys to Evaluating a Crowdfund: in this video. I want to quickly talk to you about 10 keys for evaluating a crowd fund when you're looking at a crowdfunding opportunity. From the investor's point of view on this is not financial advice. I think there are 10 main areas that you need to consider when they fall into three different segments, and the first of these is management. So when you're looking at the management, you need to look at their skills. Have they collectively got the right skills to run the company to do the finance to do the sales and marketing? Have they got the experience of working with a small company? Can they show in their CV success with startups or success with fundraising? And you want to know as well what's of commitment they've made? How much skin in the game have they actually put? Then you need to take a close look at the product on the first point. To look at here is the market the product is in. So you need to understand how it fits into its market on what is unique about that product . What is gonna make it stand out and really capture the attention off its potential audience . And, of course, to do that as well. Look at its competition. See what other products out there that compete with it on one of the good ways of testing that success is toe. Have a look at its traction. How many units off the product have sold? How many customers, how many clients does the company have? And finally, then look at the investment side. And the start of this is to look at the profitability that take a look at the profit and loss account and see what the revenues have being like, what the cost looked like on what the profits appear to be. The clash flow is critical. How much money do they need to raise, how much runway isn't going to give them and when other gonna break a cash flow positive on , actually go from being losing, burning up money to actually creating money, putting it in the bank. So look at the cash flow statement very carefully, and of course, you want to see what the potential returns are going to be because you want a 10 X your investment. So those are the 10 key areas of evaluating a crowd fund, so if you can take that systematic approach, hopefully you'll end up with a much better evaluation for the opportunity you're looking at .