Investing of any form is fundamentally risky. Investing in early-stage ventures is considered among the riskiest investments, as there is little certainty about the company’s future success. It is therefore recommended to diversify the risk among many small investments of this type.

Below, we identify and explain some of the most common risk areas associated with investing in early-stage ventures.

Project risk

The risks that are inherent to a specific project on the platform.

These risks may include but are not limited to a lack of adequate funding, potential legal concerns, and technological, operational, and reputational risks.

Sector risk

The risks that are derived from the fundraising company’s specific sector.

Such risks may arise due to multiple reasons, including but not limited to changes in the macroeconomic environment, new technologies making the product/service obsolete, regulatory, market, environmental, and political risks.

Default risk

The risk that a project company may be subject to bankruptcy or other insolvency proceedings, or any other occurrences that render the company unable to pay its obligations.

This may happen due to different factors, including mismanagement, fraud, team incompetence, unrealistic projections, and more.

Returns risk

The risk that the return realised from the investment is lower and/or later than expected, including the loss of the entirety of the capital invested.

Startups and early-stage ventures are naturally risky enterprises, and generally have a much higher likelihood of failure than more established and mature companies. It is, therefore, entirely possible that investors may not realise any returns on their investments, or they may receive a return much later than expected.

Liquidity risk

The risk that an investor may not be able to sell their investment when they want, or at the price they want, usually due to a lack of willing buyers.

Unlike publicly traded stocks, shares in private companies are much harder to sell. Therefore, investors that choose to invest in private companies via equity crowdfunding should be prepared to hold their investment for an extended period, potentially several years, before they can realise a return.

Platform risk

The risk that the crowdfunding platform, either temporarily or permanently, can not provide its services.

Crowdfunding platforms act as intermediaries between fundraising companies and investors, and if the platform were to fail, it could have major consequences for its investors.

Other risks

There are, of course, additional risks that an investor bears when they invest in an early-stage venture through equity crowdfunding. Other risks can include currency risk, if your domestic currency is different from the investment currency, concentration risk, if you invest a large portion of your portfolio in a single company, and timing risk, if you decide to enter or exit the investment at the wrong time.