“Wait a second,” said my girlfriend. “Aren’t you supposed to be showing people how to make money?”
I’d just shared this week’s essay topic with her. Now she was looking at me like I had three heads.
She had a point. It’s true that we generally try to show you how to make money. But I like to think we’re here not just to educate, but to entertain as well.
So this week, I thought it would be fun to show you 3 quick and surefire ways to lose money in equity crowdfunding.
Let’s get started!
Tip #1 – Make Sure the Company Doesn’t Solve a Problem
Here’s one of the best ways I’ve seen to lose money on an investment: put your money into a company that doesn’t solve a problem.
If a startup is building a product that solves a major problem, step away from those investor documents! That’s is a telltale sign that the company might become successful. And certainly, that’s not what we’re looking for today.
Let’s look at an example. One of the great Crowdfunding success stories to date is a company by the name of Uber.
Uber allows people to hail a cab or car service from their mobile phone – perfect for those times when you’re short on time, stuck in the rain, or find yourself in a less populated neighborhood.
Uber is very clearly solving a problem for many people, so if I were trying to lose money when they first raised capital a few years ago on Angel List (one of the sites we feature on Crowdability), I would have shut my eyes, turned my back on them, and walked away.
Why? Because remember: we’re here today to make some bad investment decisions and lose some money!
Tip #2 – Make Sure There Aren’t Any Smart People on Board
Here’s another great tip. If you’re looking to lose money, make sure no smart people are in the vicinity of the company – either as investors or operators.
You’ve been warned. This means no successful Angel Investors, no Venture Capitalists, and no experienced entrepreneurs!
If your goal is to lose money fast, you need to focus on companies that have inexperienced management, and have only a handful of friends and family listed as investors. The less sophisticated the overall group, the better.
Better yet, look for companies that have no investors at all. Be the first person to write a check!
Here’s a perfect example. Take a quick look at a company we featured on Crowdability a couple of months ago: True & Co. »
True & Co. makes it easy (and private) for women to buy undergarments online. Great selection, no more annoying dressing-room experiences, and no more wasted time in stores.
If I wanted to be absolutely certain of losing money, I would have taken extreme measures to avoid this investment.
Not only was True & Co. solving a real problem, but the company had two brand-name Venture Capital firms involved. On top of that, one of them joined True & Co’s Board of Directors.
That’s just too much smart thinking and too much smart money. If you’re going to be serious about losing money, you need to stay away from companies like that.
Tip #3 – Make Sure The Company Isn’t Looking to Make Money
Pay attention, folks, because this is very important:
If you’re looking to lose money, you need to set your sights on companies that want to lose money, too.
Narrow down your list of investment opportunities to companies that aren’t currently making money, and have no plans to do so in the future.
If a company is already generating profits, run for the hills.
You might ask: What if they’re simply generating top-line sales but no profits?
We say: Ditch it anyway. Why take the risk?
In fact, if the company so much as mentions a “revenue model,” write them off. Move on.
If you’re going to be serious about losing money on an investment, stick with companies that have no idea how they’ll make money.
As an example, let’s take another look at True & Co. Aside from having a product that solved a problem and having really smart investors involved, they had significant sales already.
To be clear, not only would I have passed on that investment because of the product and all the smart people involved, I would have passed again because of all this, this… revenue happening.
I mean, revenues? Really? C’mon. That’s no way to lose a fortune in equity crowdfunding.
BONUS TIP – Don’t Forget to Put All Your Eggs in One Basket
And here’s one last tip to ensure you end up in the poor house.
If you want to be serious about losing money in equity crowdfunding, make sure you don’t diversify. Go ahead and plow every penny of your investment capital into a single company that:
1.Has a product that doesn’t solve a problem
2.Has no sophisticated investors, operators or advisors involved
3.Has zero plans for how to make money
If you stay focused and keep all these tips in mind, you stand a very good chance of being flat broke in no time.