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According to research by Vanda, retail investors have deposited $400 billion in the stock market since 2020. This is double the number of shares they have bought in all past years combined. Traditionally, retail investors who are financially vulnerable and risk averse have steered clear of risky asset classes and stuck to the 60/40 investment strategy. However, the scenario has now changed.
On the back of fintech and blockchain technology, retail investors are now marking their presence in new territories. Fintech apps made it easier for retail investors to access the stock market, introduced commission-free trading, and provided out-of-the-box 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 favorite fintech application.
Blockchain technology, meanwhile, democratized the financial markets and lowered their barriers to entry. Asset classes such as securities, derivatives, equities, debt and commodities, which were previously outside the realm of the private investor, are now easily accessible via the blockchain, thanks to asset tokenization. Blockchain-based protocols have recently opened the doors of venture capital to private 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?
Financing startups has always been the strength of venture capitalists. In fact, the VC market is considered to be the engine for innovative startups. But this space is mainly occupied by institutional investors; retail investors represent only 1% of that. This leads to countless problems. The dictatorship of institutional investors over the VC market is putting startups in a stranglehold. And according to TechCrunchVC is killing more startups than slow customer adoption, technical debt, and co-founder fights – combined.
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Why? Simply because VCs operate with a fierce growth-first attitude and are more concerned about their own well-being than the well-being of startups. VCs take big swings and want big payouts very quickly. Founders are thus forced to scale up and branch out prematurely. They are given minimal time for innovation, product development and brand building. In addition, the founders’ stake in the company is greatly diluted by VCs. Founders are lucky if they still have 20% of the stake at the end of the funding rounds.
At the end of the day, if premature scaling leads to failure, VCs buy out or liquidate the startup. Any outcome kills the vision and mission of the founders.
With retail investors in the picture, the monopoly of institutional investors ends and the VC market is democratized. Retail investors can bring back the innovation-first attitude and drive long-term growth of startups. But it’s not as easy as it sounds.
Entering the startup space for retail investors: hurdles and solutions
As mentioned above, retail investors are traditionally risk averse, and unlike VCs, they don’t take big swings with their money. Retail investors also lack the capital to fund startups themselves and the knowledge to carefully research potential startups. 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 ramp to enter the retail VC market, bypassing the hurdles. Blockchain-based incubators and accelerators fuel promising startups from the ground up and equip them with the essential tools and strategies for success. So, really, the vetting process is already done. These platforms have expert entrepreneurs and advisors who recognize the potential of startups. Now all that remains is to bring these promising startups into contact with private investors.
This can be done by promoting global fundraising campaigns and allowing many private investors to pool capital to fund startups. In this way, the low-capital problem is reduced and the associated risk is distributed among a group of investors. Investors can invest as much or as little as they want in startups and no one takes the full fall.
In other words, the barriers to entry for retail investors are significantly lowered. And if NFTs support these fundraising campaigns, the barriers go even lower. NFTs have recently emerged as the most popular and most coveted asset class. NFT collections that include corporate dividends, board voting rights and other premium features can easily interest retail investors and bring them into the startup ecosystem.
A version of this is already in action in the entertainment industry, with producers using NFTs to fund their movies. Even big names like miracle, DC and heavy Metal quickly jump on the NFT wagon to get fans on board with the digital revolution.
In conclusion, blockchain-based accelerators conducting global fundraising with NFTs at their core could bring an influx of retail investors into the VC space. And this massive entry of small dollar investors could play an important role in further developing and launching high-potential startups.
Democratizing the startup ecosystem is the way forward
As blockchain technology grows in popularity and value, major industries around the world are looking to decentralization as the way forward. From finance and entertainment to the internet and social media, there is a paradigm shift in power dynamics taking place away from control of central institutions. Naturally, the startup ecosystem follows suit.
Lowering barriers to entry and bringing retail investors into the startup space ensures that innovation thrives and founders have the freedom to build and scale at their pace, fueling the long-term growth of startups.
Gaurav Dubey is the CEO of TDeFi.
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