Do’s and don’ts if you’re wanting to make a buck off the next ‘big thing’

OPINION: Have you seen the new ice-tongs that style and condition hair? Instead of heat, sub-zero temperatures are used.

Roholm have just raised $539,000 in new capital from 39 investors. Invest $3000 and their Inverse Hair Conditioning tongs came with the share certificate.

What about an automatic boat loader? It lets you launch your boat and retrieve it without getting your feet wet. That should save a few arguments on the divorce-ramps around New Zealand. Balex Marine raised $330,000 from 80 investors.

Vets might soon be attaching a Fitbit to our dogs. Actually, it's not a Nike product. Its called Heyrex and it monitors food intake, post surgery recuperation and exercise.

Heyrex is even selling water bowls that refill and dispense pet vitamins into the water. Last year, 70 investors put in $870,000.

Where do you find out about these companies? They all appeared on a New Zealand crowdfunding website called Snowball Effect.

Roholm and Heyrex required a $1000 minimum investment and Baylex $2000.

Other active platforms in New Zealand are Collinson Crowdfunding, Crowdsphere, Equitise, Pledge me and Crowd88.

The Financial Markets Authority regulates these platforms, but the investments themselves are not monitored.

So would you take the plunge?

My hair is prone to frizz, launching the boat causes a flap and I've got a podgy dog, but personally I don't invest in the next big thing.

That's not because these are terrible investments. I've owned a start-up and dealt with enough risk to have cured myself for a lifetime. For me, I'd need to be on the inside, not the outside.

Most people are different to this and simply want the chance to make a potentially big return from a small capital outlay and get behind an exciting idea. That's a valid position to take.

Get a share certificate

Equity crowdfunding allows you to take a small stake in a company without it being listed on the sharemarket.

The law lets firms raise up to $2 million in new capital in a 12 month period, from ordinary retail investors, with very little documentation or cost.

Don't confuse this with social crowdfunding. The most famous case being Oculus Rift, a company selling virtual reality headsets.

With a $300 donation you got free goggles. It raised a couple of million dollars in its early days, but no one got any shares.

Facebook purchased Oculus Rift for $2 billion. As an investment, $300 would have returned $43,000.

WHAT TO ASK YOURSELF:

What percentage of your savings will you invest?

In my view, less than 1 per cent. Otherwise, it's any amount you never need to see again.

Do you understand the meaning of ultra high risk?

This makes Argentina's stock exchange look like a pussycat.

It's fall off the planet, explode, never to be seen again stuff. Be prepared to double or triple all the timeframes in the business plan. Don't let this put you off it's just a reality check on the amount you invest.

Can you stomach no liquidity?

You are unlikely sell your shares until the company is sold or lists. Any outcome less than 10 years is nothing short of a miracle.

Is your real wealth management plan on track?

This is not part of your wealth or retirement savings plan. Chop off your tongue if you ever discuss it in the same sentence. It doesn't qualify.

Do you understand the product or service?

Never invest in something you can't explain to your mother.

Are you investing because you know the owner?

Does the relationship survive if you never see a return? Would you still invest if you didn't know them?

Experience of the owners?

If they are crossing out of their own industry it's a warning sign. Experience can't be bluffed.

Have other directors invested money?

It's a question to help judge commitment.

Personal finances of the owner?

Be as interested in their ability to work for several years without a wage, as their sales guesstimates. Do they have a working spouse and a mortgage free home?

Wage dependency is a red flag.

What is the money being used for?

Cross your fingers it's not for wages.

Are there sales yet?

Understand exactly how this affects the breakeven timeline.

Who are the closest competitors?

You don't have to be first to market, but you do need a new approach or a barrier.

Has this company tried to raise money from venture capital, angel or incubator funds? If not, why not?

If so, why were they turned down? A catch 22, but you want to see they've explored their options.

Are there any well known investors putting in money?

Not a necessity, but it gives a little confidence.

Janine Starks is a financial commentator with expertise in banking, personal finance and funds management. Opinions in this column represent her personal views. They are general in nature and are not a recommendation, opinion or guidance to any individuals in relation to acquiring or disposing of a financial product. Readers should not rely on these opinions and should always seek specific independent financial advice appropriate to their own individual circumstances.