Being on the forefront of all things crowdfunding, we get to see how new technologies are solving old problems. One of the areas where I bet we will see ‘less of a big’ problem is fraud when it comes to the private capital markets. Sometimes we hear stories of people investing in a business they heard of through a friend of a friend only to find out it was a scam, the company didn’t exist, or it was a shell business formed to steal money from unsuspecting investors. More often than not, these investors lose out on their money because it is impossible to track down the perpetrator.
The reason these scams take place is there is usually no one vetting the scammer. This is a problem technology companies like Early IQ (in full transparency we are an advisor to Early IQ) are solving. Early IQ has figured out how to detect fraud with almost 100% accuracy. The system works by requiring that individual’s self-disclose certain information up front that is then verified. Their team, databases, and algorithm then go to work to see if they are a real person, at a real address, with a real phone number so that if anything goes wrong the police know where to get them.
With Early IQ, investors that want to invest in businesses that have been through an Early IQ fraud detection don’t have to worry about a potential shyster taking off to the Cayman Islands with their investment. This doesn’t guarantee that the business will be a success, but at least we’ve removed one of the biggest problems in the private capital markets, identifying fraudsters before they have a chance to commit fraud.
This got me thinking, what if Craigslist were to require everyone listing an item for sale or an apartment for rent to go through the same background check. How much fraud could be reduced on Craigslist if everyone selling something there had to have a badge certifying that they have a clean slate? And to prove it, you could click on the badge and it would take you to a website like Early IQ’s to confirm they performed the background check. How much money would be saved from trusting buyers or renters that have been taken advantage of by unscrupulous scam artists?
I bet a ton of money and here’s a personal reason why. I listed my condo for rent this past spring on Craigslist. Some shyster took pictures of my pictures and started renting it as a short-term rental in a different area on Craigslist. He used a story that he was my tenant and was subletting it because he was transferred on assignment to Alaska. This was a total lie but he used my name, pictures and listing to build credibility.
More than 5 people eventually saw my real post and called me to say they lost money to this guy! They each sent him a deposit and never heard from him again. One poor soul showed up at the condo to MOVE IN for 3 months only to find out she’d been scammed. I have no idea how many more people were taken advantage of.
Here’s another real life example. I have a friend who runs a specialized online horse tack store and received a large order to be shipped to Argentina (not too crazy as this sport is popular there), but the “customer” required that he use a specific freight forwarding company rather than UPS. Turns out that company didn’t exist. Imagine if he had required an Early IQ check on the freight forwarding company?
The analogy in B2B is that most if not all large corporations require new vendors to complete a vendor information application – generally run them through a BBB check and a credit check. But for smaller companies and smaller vendors, it’s not practical or particularly effective.
But think about all the fraud that could be deterred and money saved if Craigslist just required all buyers and sellers to be verified? Think about the confidence people would have in Craigslist as a real marketplace if they knew they could track down and hold a fraudster accountable?
The technology and businesses like Early IQ are there. The reality is, Craigslist is just a “listing service” and “buyers need to beware.” Easy enough to hide behind that but if they really want to establish a credible marketplace as the crowdfunding industry is doing by verifying that the sellers of securities in businesses are real people at real addresses with real companies, perhaps companies like Craigslist need to incorporate some of these new technologies into their own business models?