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Whether you’re an experienced or accredited investor, or just dipping your feet into startup investing, the FastCTO Score and report can help you wrap your head around an offering.

The Rise of Crowdfunding

Up until a few years ago, if you wanted to invest in a startup, you had to be an Accredited Investor (an actual SEC definition). There are plenty of reasons why these regulations were in place but it also cut out the majority of the population from investing in private securities (usually startups) in any meaningful way. That’s a lot of opportunity that was simply not available to the average person.

Then a couple of folks created the first crowdfunding exchanges. This was mostly good but completely unregulated with a lot of opportunity for malicious companies to do predatory things. The SEC didn’t like that.

So after a couple of years (13 or so), the SEC put out some regulations on how to do crowdfunding “properly” (or at least with a little more oversight and a little less chance for folks to swindle others) — first through the JOBS act and then through Reg CF.

Where Are We Now

With the introduction of Reg CF in 2016, crowdfunding exploded — there are now almost 50 exchanges in the US where non-accredited investors can find and invest in legitimate companies. These additional regulations stabilized the ecosystem and allowed for fair investing for everyone.

The stability of this ecosystem over the last couple of years is finally starting to attract experienced and longtime investors and even mutual funds and other big enterprises to the crowdfunding space.

This is great and legitimizes crowdfunding but there is one big problem —

Where Are The Due Diligences?

Back over in the “accredited investor world”, when an investor or a group (an angel group, a VC fund, etc) consider a company, they perform something called a Due Diligence. In simple terms, it’s a pretty deep dive into the company’s founders and team, operations, financials, legal, and technology to make sure that the investment they’re about to make is sound. Depending on the size of the investment, these due diligences can take anywhere from a few days to a few months — whatever is required to make an investor comfortable with the check they’re about to write.

But in the crowdfunding space, these due diligences are completely absent. Instead, potential investors, accredited or not, are typically faced with a promotional page crafted by the company and a dry SEC filing which doesn’t provide that much interesting information. There is no independent review, there is no deep dive — there is nothing to judge the company by except for the glowing listing crafted by the founders.

For investors that started in the crowdfunding space, this is not surprising or jarring, but for investors that are used to these resources being available when considering writing big checks, this is often a non-starter.

Enter, FastCTO Score

FastCTO is a network of vetted CTOs all over the world. We work with startups in a variety of ways and we work with buyers, investors and sellers to provide highly specific technical due diligences and pre-due diligence checkups. VCs and private equity firms depend on us to determine whether to make big investments and acquisitions.

When performing a due diligence for a company seeking to raise millions of dollars, we typically take several weeks to do discovery, report writing and presentation of materials. This is pretty expensive, but they can afford it.

For crowdfunded companies that are typically looking to raise much less, we can do a fairly deep dive, a sit down with the team, a review of processes, architecture, design, strategy, and code and provide both a report and an overall score to help guide potential investors in just a couple of days.

Now all investors, “sophisticated” and not, have the benefit of an independent due diligence from a trusted source to validate their investments or prevent them from making investments not aligned with their risk tolerance.

Interpreting The FastCTO Score And Report

It’s important to understand how to interpret the Score and the report — both as an experienced investor and not.

As An Experienced Investor

You’re an experienced or accredited investor who has invested either alone or as part of a group before — this report is for you. In our findings, you’ll see what the team did well and what the team did wrong. You’ll get a sense of the quality of the existing technology and processes, any upcoming emergency remediation projects, and any upcoming necessary changes and roadblocks to MVP (or next phase).

This report should be similar to due diligences you’re used to seeing and you can make an educated choice whether the problems surfaced are acceptable risks.

As A First Time or Crowdfunding-Only Investor

Don’t let this report scare you. The purpose of a due diligence is to be honest about the good and the bad — it is neither to encourage or discourage investments. There are no perfect companies and even unicorns have serious problems under the hood.

It’s unlikely you’ll ever see a 10 in any category and it’s unlikely that a company will even be above a 5 in every category — not many companies, even established and well-funded ones excel at everything, or even most things.

So as you’re reading the report, consider whether the problems are inline with what you expect from an early stage startup by your own value judgement. If a startup got a 0 in documentation but you don’t feel that’s a big problem, then don’t let it become one for you. However, if you’re all about customer service and you’re considering a customer-facing startup that hasn’t thought about customer service, maybe the team’s values don’t align with yours. That’s not necessarily a reason not to invest, but at least now you know and can make a more educated decision — that’s what the FastCTO Score is all about.

Either Way

We love the startup community and we spend every day working to make it better worldwide. The lack of these due diligences in the crowdfunding space is a friction point for more investors and more experienced investors from entering it — and that’s not good for the community.

We hope that everyone reading this and our reports gain a deeper understanding of investing, startups, and more importantly investing instartups.

Good luck!

 

*  *  *

This post was written by Igor Belagorudsky (Boston-based Founder, President, Advisor, Board Member, and CTO of a number of startups, and a Mentor in the Boston Founder Institute), and was originally published on Medium

FastCTO is a network of real CTOs that consult startups that neither need nor can afford full time CTOs. Startups get access to experienced, high valued CTOs for a few hours a week from formation through Series A and beyond. FastCTO is not a dev shop, an agency, or a staffing company

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