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Layperson interest in early-stage venture funding has never been higher. In recent years, fintech innovations have empowered consumers to attain more agency over their financial fortunes; such services have made managing personal finances easier, safer, and — given the trend towards gamification — fun. Consumers are certainly enthusiastic: consumer adoption spiked from 58% to 88% between 2020 and 2021 alone, according to a recent Plaid report.
The emergence of fintech tools has also empowered consumers to have more direct power over their investments. Conventionally, high net-worth individuals would rely on a broker or advisor to curate their investment portfolio — an out-of-sight, out-of-mind approach that required a significant amount of capital and costly fees. But now, fintech platforms like Robinhood and Coinbase give investors at every income level the option of managing their investments alone.
However, this financial empowerment has been limited to certain spheres. While retail (e.g., layperson) investors have successfully penetrated the equity market, their participation in the venture capital (VC) sector has been minimal to the point of intangibility.
Retail investors lack easy access to VC opportunities — for now
In 2020, equity crowdfunding — i.e, retail participation in the private investment market — achieved a total volume of just $1.5 billion. This amount accounts for less than 1% of the global VC market, which totaled $300.5 billion the same year. As Wealth Club’s founder, Alex Davies, put the matter for the Financial Times: “Private markets are an exciting area which is usually impossible for normal investors to get a slice of the pie.”
Why, then, are retail investors so underrepresented in the VC sector? For the most part, the issue stems from their non-expert status.
Venture capitalists are professional investors; they have extensive connections in the business world and are sought-after for their advisory skills as well as their checkbooks. But for retail investors, investing isn’t a full-time job — it’s an interest they pursue with their spare time and money. As hobbyists, they often lack the connections necessary to learn about fledgling ventures before they hit the equity market, much less get involved in the development process.
Retail investors also tend to have a lower risk tolerance than the average VC. Venture capitalists often make investments knowing that they could lose everything. Per a CB Insights report, 67% of venture-backed companies either flop or become self-sustaining and no longer provide a possibility for returns.
For a professional investor, these losses might just be the cost of doing business. But for retail investors who invest their extra income, a two-out-of-three chance of failure isn’t a particularly appealing prospect.
Retail investors’ lack of connections and low-risk tolerance makes perfect sense, given their non-expert status. However, those factors have also caused retail investors to remain locked out of the VC sector even amid the digitally-empowered fintech revolution.
This exclusion is a problem. For one, it drastically reduces the amount of funding available to startups. Secondly, it leaves founders subject to the whims and preferences of conventional VC investors, who may demand changes out of line with the founders’ vision, prioritize scalability over sustainable growth, or be unwilling to entertain more novel ideas.
“With retail investors, the market is blessed with flexibility as their volume supersedes any scope of collusion or dominance,” noted Rayol Hwang, a crypto advocate and the CEO for Hillstone Partners, in an article for Nasdaq earlier this year. “Even the entrepreneurs face no undue pressure to scale their businesses and can focus on sustainable growth.”
Retail investors could give wings to fledgling projects — provided they can enter the VC market in the first place.
Blockchain-based venture capitalism: an inclusive fundraising solution for retail investors?
If deployed correctly, blockchain-based solutions could empower retail investors to make the most of early-stage opportunities without taking on an overwhelming risk burden. The technology can knock down the two main barriers amateur investors face today: risk and opportunity awareness.
Let’s consider risk first. Under a conventional investing arrangement, a retail investor simply hands over a set amount of capital and hopes for a return they may never receive. However, if a startup raises funds via the blockchain, it can offer investors the option of providing liquidity via tokenized staking.
With tokenized staking, an investor purchases tokens — such as project-specific cryptocurrency assets that can be traded, stored, or sold. This stake provides funding for the project and offers the investor some protection, as tokens accrue value as currencies in their own right. Investors can offload these assets if they lose faith in the project or simply want to recoup a loss. Startups can further shield prospective investors against loss by anchoring their token prices to real-world assets such as gold, silver, or fiat currency.
Dynamic Coin Offering (DYCO) offers an illustration of this idea. Under the DYCO model, startups back their tokens to fiat currency (USD) for 16 months. If investors want to leave the project within that grace period, they can recoup their investment. Fiat backing can also defray investor fears of crypto volatility, as tying a token’s asset price to USD sets a price “floor” while still allowing for value growth.
Tokenized staking enables retail investors to invest in early-stage opportunities without facing a two-thirds chance of total loss. That said, risk reduction isn’t the only benefit this arrangement offers. As token holders, retail investors have the opportunity to contribute to and be heard within a project’s community by voting on proposed project changes. They aren’t just checkbooks; their voices matter.
This capacity for investor participation speaks to the heart of VC culture. Venture capitalism isn’t just about fundraising — it’s about providing advice, guidance, and support to founders as they lift their ventures off the ground. To date, those advisory contributions have been provided by a limited pool of conventional VC investors. By hosting early-stage investment and fundraising opportunities on the blockchain, founders could gain access to a wealth of funding and fresh perspectives.
To reap blockchain-based fundraising and opportunities, retail investors need formalized support
Blockchain offers retail investors an opportunity to usher in a new era for venture capitalism — but it won’t automatically deliver it. To break down the proverbial walled garden around VC, retail investors will need a user-friendly, fiat-enabled platform that supports and guides them through the investment process.
There are a few reasons for this. One, retail investors are ordinary consumers; most won’t have the skills or inclination to navigate the complex Defi ecosystem without guidance and fiat support. Secondly, amateur investors may be hesitant to invest without assurance that a blockchain-based project is legitimate. After all, it’s not unheard of for unscrupulous profit-seekers to pour into a project, pull out when its token price peaks, then leave the project and its remaining backers to crumple without funding. Then, there are compliance considerations. Today, regulation uncertainty is prevalent enough to give any amateur investor pause.
However, if retail investors gain access to an organized, layperson-friendly platform that facilitates fiat onboarding, provides vetting services, and offers compliance support amid an evolving regulatory landscape, retail VC investing could very well become a norm.
The investing sector needs this change. For years, the threshold to entry for VC investing has been too high for the average layperson to summit. As a result, startups and investors alike have been limited in their capacity for achievement. But amid a massive consumer shift towards digital finance, we have the opportunity to use layperson-friendly blockchain solutions to knock down exclusionary walled gardens and provide a genuinely welcoming, reasonable-risk environment for retail investors.
All we need to do is act on it.
Hatu Sheikh is a cofounder of DAO Maker.
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