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One Trick for Crowdfunding Investing Success

Written by Alexandra Perry
Posted March 9, 2017 at 7:06PM

Back in 2014, Zack “Danger” Brown raised $55,492 to make potato salad on Kickstarter. His entrepreneurial feat brought crowdfunding into the public eye. But the stunt also highlighted one of the real dangers in the crowdfunding movement: lack of investor responsibility.

Brown was not special. What he did can be replicated easily. He hopped on Kickstarter and assured followers that he would make potato salad with enough financial backing.

The crazy thing is that he blew past his goal. His “investors” loved him. People threw money at the “venture” hand over fist. They were amused, willing to participate in the Internet joke.

But in the end, they didn’t get anything out of it but a short laugh.

When you invest in startup companies through crowdfunding, you are responsible for researching the company and its product.

Of course, I think Brown's investors knew they were in it for a laugh, but tons of investors replicate the process with real companies that can really fail, losing buckets of capital.

So Much Power

You have the power now. In 2016, the Crowdfunding and JOBS Act made it possible for investors to help startups raise capital through crowdfunding. People with limited capital — not the AngelList investors — have the ability to jump on the next unicorn company.

So how do you make sure you aren't getting suckered into a bad deal?

First, exercise self-restraint. Take time to learn about the company you are interested in. And get in touch with its founder — most founders heading crowdfunding ventures are more than happy to talk to potential investors.

Doing your due diligence and research will allow you to distance yourself from a company and make an educated decision. It is also important to recognize the most critical crowdfunding truth....

You Are Not the Market

Just because you want something doesn’t mean everyone else does. I learned this lesson the hard way when I invested in my first crowdfunding venture: an electric skateboard company.

To me, the investment was incredible. Who wouldn’t want to hurtle along at a breakneck speed on an unstable plank that needs to be charged every mile?

It turns out... a lot of people.

The project couldn’t gain traction. I never got my electric skateboard.

So, here is my warning to people who are excited about crowdfunding: Be responsible. There is no safety net, which is why the reward is so great. But it is easy to recognize good companies and time bombs when you do your research.

You have to think about how that company — and its product — will perform when exposed to the broader market. Will other people jump on board, or are you footing the bill for a product that no one else wants?

That said, if you don’t feel comfortable making your own call, there are crowdfunding platforms that help guide investors to sustainable investments. These platforms screen companies to ensure that they have long-term potential.

So, fall in love with crowdfunding — but do it cautiously. You have great power to invest. But you also have great power to fail.

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