The rise of retail investors could accelerate the growth of blockchain startups
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According to research by Vanda, retail investors have turned $400 billion on the stock market since 2020. This represents double the number of shares they bought in all recent years combined. Traditionally, retail investors who are financially vulnerable and risk averse avoid risky asset classes and stick 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 making their presence known in new areas. Fintech apps made it easier for retail investors to access the stock market, introduced commission-free 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 investors based in the US they are likely to switch banks if their bank is not compatible with their preferred fintech app.
Blockchain technology henceforth democratized financial markets and lowered their barriers to entry. Asset classes such as securities, derivatives, shares, debt, and commodities, which were previously off limits to retail investors, are now easily accessible via blockchain, thanks to asset tokenization. Blockchain-based protocols have recently opened the doors of venture capital for retail investors. And their entry into the VC market is a revolution that has the potential to boost the startup ecosystem.
Retail investors in the startup ecosystem: where do they fit?
Financing startups has always been the forte of venture capitalists. In fact, the venture capital market is considered the engine of innovative startups. But this space is mainly occupied by institutional investors; retail investors represent only 1% of it. This leads to a myriad of problems. The dictatorship of institutional investors over the venture capital market puts startups in a chokehold. and according to TechCrunchVC kills more startups than slow customer adoption, technical debt, and co-founder infighting, combined.
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Why? Simply because VCs operate with a fierce growth-first attitude and are more concerned with their own well-being than the well-being of startups. Venture capitalists take big swings and want big payouts very quickly. Thus, founders are forced to scale and diversify prematurely. They are given minimal time for innovation, product development and brand building. Additionally, the founders’ stake in the business is heavily diluted by venture capitalists. Founders are lucky if at the end of the funding rounds they still have 20% of the stake.
At the end of the day, if premature scaling results in failure, the VCs buy or liquidate the startup. Any result kills the vision and mission of the founders.
With retail investors on the scene, the monopoly of institutional investors ends and the venture capital market is democratized. Retail investors can bring back the innovation-first attitude and drive the long-term growth of startups. But it is not as easy as it seems.
The Entry of Retail Investors into the Startup Space: Obstacles and Solutions
As mentioned above, retail investors are traditionally risk averse and, unlike venture capitalists, do not make big changes with their money. Retail investors also lack the capital to finance startups in their own right and the knowledge to carefully vet potential startups. These factors could make it difficult for them to enter the VC market, once again leaving startups at the mercy of VCs.
Enter blockchain-based incubators and accelerators. These platforms provide the required gateway for retail entry into the venture capital market, bypassing the hurdles. Blockchain-based incubators and accelerators nurture promising startups from the ground up and equip them with the essential tools and strategies for success. So, really, the investigation process is already done. These platforms have expert entrepreneurs and advisors who can recognize the potential of startups. Now, all that remains is to connect these promising startups with retail investors.
This can be done by promoting global fundraising campaigns and by allowing many retail investors to raise capital to finance startups. In this way, the problem of low capital 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 person takes the blame entirely.
In other words, the barriers to entry for retail investors are lowered significantly. And if NFTs support these fundraising campaigns, the barriers are even lower. NFTs have recently become the most popular and coveted asset class. NFT collections containing company 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 finance their films. Even big names like Wonderful, DC Y Heavy Metal they are quickly jumping on the NFT bandwagon to get fans involved in the digital revolution.
In conclusion, blockchain-based accelerators conducting global fundraising with NFTs at their core can attract an influx of retail investors to the VC space. And this massive influx of small 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 around the world are looking at decentralization as the way forward. From finance and entertainment to the internet and social media, a paradigm shift in power dynamics is taking place, taking control away from central institutions. Naturally, the startup ecosystem is following suit.
Lowering barriers to entry and attracting retail investors to the startup space ensures that innovation thrives and founders have the freedom to build and scale at their own pace, fueling long-term startup growth.
Gaurav Dubey is the CEO of TDeFi.
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