How to Reduce Risk in Equity Crowdfunding Investments

Higher the risk, higher the return’ is one of the cardinal rules of investing. Equity crowdfunding falls among the asset classes that promise high returns but always comes with high risk. In this article, we will discuss how you can manage and minimize the risks related to equity crowdfunding investments.


1- Understand the Business/Revenue Model: One of the most important deciding factors for investing in a startup shall be the clarity of its business model and revenue model. Investing in a company without a sound value proposition and a large enough market is bound to be a loss-making gamble. Similarly, a startup without a clear revenue model and a scale-up plan is also likely to fail.


2- Understand Who are the Promoters: A vast majority of VCs consider the Founding Team as the single most important determinant for a startup’s success. This decision is not a random one and the VCs have found and validated the importance of this factor over their decades of investing experience. Before investing in any startup, you should thoroughly analyze the founding team’s academic profiles, prior relevant experience, previous startup founding experience, and most importantly the passion and commitment towards the prospective startup for investment.


3- Deep Due Diligence: Due to less stringent reporting/filing rules for startups raising through equity crowdfunding, much lesser information is available for such startups compared to public stocks. While the information may not be as easily and directly available, you must gather information through news articles, social media, founder interviews, and other information sources to arrive at a more informed decision. You must deep dive not just into the financials of the company, but also form an opinion on the prospects of the industry/business sector, and prospect’s competitive advantage.


4- Ask Questions: While a lot of due diligence information can be gathered online, you must not hesitate to ask the founders any further questions you may have. Most equity crowdfunding portals do provide a venue for online questions investors might have about an individual investment.


5- Diversify: The biggest advantage offered by all P2P models is the ability to diversify risk. However confident you might be regarding a startup’s future potential, it is always advisable to not put all the eggs in one basket, and instead spread the investment across multiple startups.


If the above suggestions are diligently followed, the risks of equity crowdfunding can be significantly reduced and make it a better investment proposition for you

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