Before Investing, Make Sure that the Emperor Has Clothes

by Dara Albright, CrowdFunding Beat Guest Editor, Co-founder of the LendIt conference & the FinFair Conference,

When weighing investment opportunities, I am always skeptical about what I refer to as the “gonna press release”, for it can be an early indication that the emperor has no clothes and that the business is merely all smoke and mirrors.

“Gonna” announcements are essentially declarations of what a company intends – or more appropriately, hopes – to accomplish. As detailed in an article I published a few months ago on Crowdfund Insider called, “When to Pivot, When to Fold”, falling into the “gonna” category include: partnerships that bring no quantifiable revenue; new hires who have yet to complete a sale; office openings that aren’t turning profits; as well as the launch of unproven, untested and unfinished products.

Not only are these wishful announcements non-accretive to revenue, most rarely ever come to fruition. Trust me, I’ve encountered enough penny stock scams in my tenure to know that the bulk of “gonna” releases are simply designed to hype stocks and lure unsuspecting investors.

Unfortunately, it is not so easy to distinguish a “gonna” announcement from a bona fide one. How does one ascertain the true value of a recently forged alliance or key hire? How does one gauge the potential of that newly launched product?

As investors, it is our responsibility to dissect company press releases and learn how the news will impact the value of our shares. In most cases, it warrants a call to the company’s CEO. First, of course, to offer congratulations and second to understand how these developments will impact one’s investment.

If it is not already mentioned in the press release, shareholders need to be asking questions such as, “is this partnership or new office acquisition immediately accretive to revenue? If not, how soon will it be? When will your latest product be on the shelves? How can I sample it? What are the margins?”

If the company is reluctant to provide details, it may be the first signal that the announcement is more hype than heart (see: “Be on the Lookout for the Unremitting Storyteller”).

Other telltale signs include:

  1. There is a very limited amount of information available about the product.
  2. The absence of any tangible product altogether. Instead of allowing prospective customers, clients or investors to purchase or at the very least “test drive” the product, they are prompted to fill out a standard form in order to learn more.
  3. Another clue that the product doesn’t yet exist can be discovered simply by viewing the company’s team page along with its “career or hiring” section. Certain products require very distinct skill sets to build. If no one on the current team possesses those competences, and if it looks like the company is seeking to hire fresh employees containing those particular skills, there is a good chance that the product has not yet been developed.

Keep in mind, this doesn’t mean that the product will never come to completion. It simply means that the product was announced prematurely and that you may be subjecting yourself to more execution risk than you were willing to take. This is especially true if the company is presently undercapitalized.

Better to know whether or not the emperor has any clothes before you cut the check than afterwards.

Many more warning signs can be identified by viewing this recent free investor educational webinar.

Dara Albright

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Recognized authority, thought provoker and frequent speaker on topics relating to market structure, private secondary transactions and crowdfinance. Welcome to my new personal blog where you can glean unique insight into the rapid transformation of global capital markets.

http://daraalbright.com/

 

 

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