The importance of investors doing their “Due Diligence” and appropriate research before any investment opportunity
The world of business is run on faith. Not the kind of faith that is present in religion, with people regularly attending church and looking to a pastor or minister for guidance. Rather, the business world looks to NASDAQ IPO’s and the stock exchange in order to gauge the value of a commodity or service, and the public stares at earning figures and Chief Executive Officer information to get at the bottom of worth. In the end, worth is determined by the market, the market being those interested in either buying or selling or in other ways making money from a business. In order to gain the confidence of a willing handful of investors in order to turn an idea into a venture, the principals of the business, the CEO and Chief Financial Officer (CFO) will need to present a lucid structure of a business plan, one which offers results either financial or in some other way rewarding. The latter effect, the “other” rewards, might be difficult to imagine, but NASA gets money from the federal government in order to fund its many programs, and NASA in no way returns to Uncle Sam a financial earnings report. In this example, NASA is giving back national pride, experience in space, and really interesting rockets to watch being blasted into space. The result here is that the government determines what results it wants, and allows NASA to achieve said results in their own manner. If government funding is not an option, and often it is not, there are other ways to launch a business.
One way to collect money from investors is equity crowdfunding. In equity crowdfunding, a NASDAQ IPO will ask a group to invest in the company in return for certain benefits. Among the non-financial benefits sometimes offered investors are free tickets to concerts, producing credits, trips to see the site, art, t-shirts, artwork or any other trinket or trash that is associated with the company. Who does a start-up company target when looking at equity crowdfunding? When talking about equity crowd-funding for an artistic endeavor, or one which will be asking for funding in the form of donation and not an investement with the promise of a return on the capital, the common groups looked at are going to be those who are fans of the artist or CEO, other artists, developers, writers, film-makers, screen-writers, gadget lovers, philanthropists, inventors, creative investors looking to practice their craft, and avid supporters of the arts. RocketHub, IndieGoGo and KickStarter. are three internet platforms for those looking to gain a following of would be donors.
When discussing an investment opportunity, one in which the capital is assured to be returned as dividends or more valuable stocks, the groups to be persued by the start-up company are different from those on the donor list. In this group will be found share holders stock holders and venture capitalists who share an interest in your business from an economic point of view. These groups and people are concerned with your product not as a means to get their name published or to support someone who needs a hand, but to reap the benefits of an inexpensive NASDAQ IPO. The internet platforms for finding investment funding groups and interest are Crowdcube, symbid and growvc.t.
The final way in which a crowd might be found for the funding of a new business is debt-based crowdfunding. In this variety of crowdfunding, investors are going to expect their initial capital back, as well as interest. These groups are going to be found amongst other business owners, entrepreneurs, and investors such as banks and venture capitalists. The well-known debt-based crowdfunding sites are People Capital, Prosper, and Lending Club. This is a group interested neither in advertising nor stock-holding. Rather, these people and organizations are going to be interested in their money making more money. Nothing more, nothing less.
The fact that the three main groups who might take advantage of a NASDAQ IPO are of very different ilks does not mean that they should not do everything in their power to learn about the company before investing in it. Doing their “due diligence”, is something often left to the attorneys working for venture capitalists, investors, and philanthropists. Even a do-gooding philanthropist is not going to want to see money thrown away on a company that does not do what it says it is going to do, or worse, does something illicit along the way to doing its proposed mission. Venture capitalists and other investors are going to want the company in question to be able to repay the capital, if a debt-based venture was the manner they came into being. This means the venture capitalists are going to do their due diligence on the CEO, CFO, and other executives, as well as take a look at any and all licenses that are needed in order to perform the functions they will be assuming. One way in which due diligence is accomplished is through the public records, those that are required to be filed with the local, state and possible federal government jurisdiction.
Should a company disgrace itself, it also disgraces its investors and, for that matter, all of Wall-Street, if it was a public company. Any IPO is going to have heavy due diligence done on it by any would-be investors, and these are people who are like private eyes for business. They know what is ethical behavior and what is not, and they should be able to follow the clues and signs left by a company that is not behaving appropriately. The need for careful due diligence is two-fold. One, to protect themselves, the investor. Nobody wants to give money away or be scammed out of it. Secondly, the private sector evaluates a potential business and is able to vote on it in one way: capital. So, if a business receives the funding it needs to start, it is assumed to be at least viable. This can lead to further investments and, if the initial investors have not done their due diligence, a toppling of multiple firms. All because the right people did not check in the right places.