Managing risk has never been easier than it is today. Worldwide, equity crowdfunding is growing exponentially. It doesn’t just appeal to the masses because of the opportunity to entrepreneurs and mainstream investors, but also because of the ease of managing risk.
“Risk” means different things to different people, but in the investment world, we see risk as the chance of the business failing, or that it will have lower than anticipatedprofits. In other words, for the entrepreneur, the risk is that the business will not be viable for a variety of reasons, all of which I will discuss later. For the investor, the risk is that the money invested will go to waste without generating a return. Finally, risk for the equity crowdfunding portals means the chances of allowing fraudulent deals, or being too lenient in carrying out due diligence. So how should an equity crowdfunding portal manage risk, given that there has already been much debate about the pitfalls and risks that investors and entrepreneurs face in the equity crowdfunding world, and how to manage them?
Before we discuss the main question, it’s important to understand the nature of risk, and how it’s related in the investment world. The nature of risk is such that no matter what we do in life, the risk of failing is always there. Whether you’ve got a full time job working for someone else, or you’ve got your own business, the risk of failing is qualitatively the same. You could argue that failing at your own business is more serious than losing a job, and yes this could be true, but it can be avoided in both situations if you’re well-equipped, and prepared to handle the challenges. If you don’t take the right kind of action, whatever you’re doing, you may fail. There is also a difference in perspective. Someone who loses a full time job and is unable to find another may also face severe consequences if he or she doesn’t have savings or assets to provide sustenance, whereas someone that started one business may fail and start another one, because he or she may be able to use what they already know.
Managing the Challenges of Equity Crowdfunding
Now that we’ve discussed risk – and what it entails – let’s look at what challenges equity crowdfunding portals face, and what’s the best way to manage them. There are quite a few portals operating in the world today: 540, to be exact, and the number increases daily. Some of these portals are quite reputable, with excellent track records due to the stringent standards of operation they have put in place.
For example, ASSOBequity crowdfunding portal from Australia, which has been operating for eight years now and has raised more than $135 million, is a model portal setting portal best practices. This is an example of a portal that has been prepared to handle the risks and challenges in its path. Other portals, however, have not done as well.
Examples of the risks that crowdfunding portals face include fraudulent deals and inefficient processing of information from investors and entrepreneurs. In the end, the portals that don’t cope with the challenges they face end up having a bad name in the industry, and don’t make enough capital to sustain their operations or their company. Under the worst case scenario, the equity crowdfunding portals can be sued if the corporate, financial, and personal information that was handed to them for carrying out background checks and due diligence is misplaced, leaked, or misused for any other purpose. Even unintended misuse of information resulting from poorly secured servers or portals that can be easily hacked can be hugely damaging to the equity crowdfunding portals.
The steps that can be taken to manage all these risks aren’t rocket science. If the portals properly carry out the job they’re meant to do, they can easily prevent these mishaps. It’s essential to execute the basics correctly, such as hiring an excellent team, conducting quality checks and surveys, and maintaining confidentiality and privacy at all times.
Cumulatively, the goal of an equity crowdfunding portal is to make the equity crowdfunding deal as swift as possible, with all the steps finalized in advance for the investor and entrepreneur, so that they don’t have to worry about the intricacies and logistics of the process including verifying credibility of parties involved. The whole point of the portal is to automate and regulate the process with the help of a system that sorts out the best companies seeking funds with the best angel-like investments. The risk in the equity crowdfunding world comes into play when the portals compromise on the stringent standards they need to employ for proper results.
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