Over the last few years as I reviewed the numerous scandals and fraud (and others yet to be discovered) within the financial sector, I continued to wonder, how can investors ever truly protect themselves from unscrupulous activity in the marketplace?
One popular option tends to circle around regulation, which in the long run will preclude innovation and entrepreneurial growth in an economy and country that requires it now more than ever.
A good friend of mine was recently telling me about his client and investor who gave $650,000 to a startup entrepreneur who essentially ran away with the money. While I am sure this was truly frustrating for the investor, it reiterated the need for an overhaul of the micro-VC/angel investing process that is currently based on trust.
Having been involved in the hedge fund and finance markets for quite some time, I am continually amazed at investors’ willingness to invest in companies who provide little transparency into their financials.
With the prominence of the new crowd funding market, one of the reasons I like to participate in sites like Lending Club and Prosper, is due to the fact that there is a great deal of transparency provided to an investor. I can review a candidate’s credit score, income verification, and the rating given by the site to see the likely hood of default on debt.
Although corporate debt is a slightly different security than equity, the same principles of transparency should apply. By giving investors access to a company’s financials and real time data, entrepreneurs are challenged to do more with less by not spending investor funds on frivolous non-revenue generating items. And Investors can rest assure that the companies they are investing in, are truly putting their capital to work.
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