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According to research by Vanda, retail investors have poured $400 billion into the stock market since 2020. This represents twice the number of equities they purchased in all recent years combined. Traditionally, retail investors who are financially vulnerable and risk-averse steered clear of risky asset classes and stuck to the 60/40 investment strategy. However, the scenario has now changed.
Riding on the back of fintech and blockchain technology, retail investors are now marking their presence in new areas. Fintech apps made it easier for retail investors to access the stock market, introduced zero-commission trading, and provided pre-built tools that offered convenience like never before. In fact, the impact of fintech has been so strong that 72% of US-based investors are likely to switch banks if their bank does not support their preferred fintech application.
Blockchain technology, meanwhile, democratized financial markets and lowered their entry barriers. Asset classes like securities, derivatives, equities, debt, and commodities, which were previously out of the retail investor realm, are now easily accessible over the blockchain, thanks to asset tokenization. Blockchain-based protocols have recently opened venture capital doors for retail investors. And their entry into the VC market is a revolution that has the potential to propel the startup ecosystem.
Retail investors in the startup ecosystem: Where do they fit in?
Funding startups has always been the forte of venture capitalists. In fact, the VC market is considered the engine for innovative startups. But this space is occupied mainly by institutional investors; retail investors represent only 1% of it. This leads to a myriad of problems. Institutional investors’ dictatorship over the VC market puts startups in a chokehold. And according to TechCrunch, VC kills more startups than slow customer adoption, technical debt and co-founder infighting do — combined.
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Why? Simply because VCs operate with a fierce growth-first attitude and are more concerned about their own welfare than the welfare of startups. VCs take big swings and want big payoffs very quickly. So founders are forced to scale and branch out prematurely. They are given minimal time for innovation, product development and brand building. Moreover, the founders’ stake in the business is heavily diluted by VCs. Founders are lucky if by the end of funding rounds they still have 20% of the stake.Source: OpenVC blog
At the end of the day, if premature scaling results in failure, VCs buy out or liquidate the startup. Either outcome kills the founders’ vision and mission.
With retail investors in the picture, institutional investors’ monopoly ends, and the VC market is democratized. Retail investors can bring back the innovation-first attitude and propel the long-term growth of startups. But it is not as easy as it sounds.
Retail investor entry into the startup space: Hurdles and solutions
As mentioned above, retail investors are traditionally risk-averse, and unlike VCs, they do not take big swings with their money. Retail investors also lack the capital to fund startups in their own right and the knowledge to vet potential startups carefully. These factors could hinder their entry into the VC market, once again leaving startups at the mercy of VCs.
Enter blockchain-based incubators and accelerators. These platforms provide the required on-ramp for retail entry into the VC market, circumventing the hurdles. Blockchain-based incubators and accelerators foster promising startups from the ground up and equip them with the essential tools and strategies for success. So, really, the process of vetting is already done. These platforms have expert entrepreneurs and advisors who can recognize startups’ potential. Now, all that is left is to connect these promising startups with retail investors.
This can be done by promoting global fundraising campaigns and allowing many retail investors to pool capital to fund startups. This way, the low-capital problem is reduced, and the associated risk is distributed across a group of investors. Investors can invest as much or as little as they want in startups and no single person takes the complete fall.
In other words, the entry barriers for retail investors are significantly reduced. And if NFTs underpin these fundraising campaigns, the barriers go even lower. NFTs have recently emerged as the most popular and most coveted asset class. NFT collections that hold company dividends, board voting rights and other premium features can easily interest retail investors and onboard them into the startup ecosystem.
A version of this is already in action in the entertainment industry, with producers using NFTs to fund their films. Even big names like Marvel, DC and HeavyMetal are quickly jumping onto the NFT wagon to get fans in on the digital revolution.
In conclusion, blockchain-based accelerators conducting global fundraising with NFTs at their core can bring an influx of retail investors into the VC space. And this en-masse entry of small-dollar investors could prove instrumental in the continued development and launch of high-potential startups.
Democratizing the startup ecosystem is the way forward
With blockchain technology rising in popularity and value, major industries worldwide are looking at decentralization as the path forward. From finance and entertainment to the internet and social media, a paradigm shift in power dynamics is underway, taking away control from central institutions. Naturally, the startup ecosystem is following suit.
Lowering entry barriers and bringing retail investors into the startup space ensures that innovation thrives and founders have the freedom to build and scale at their pace, propelling the growth of startups in the long run.
Gaurav Dubey is the CEO of TDeFi.
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