Low-risk equity frameworks democratize venture capital markets and onboard retail investors

The venture capital (VC) market is undoubtedly the backbone of the global startup ecosystem, helping thousands of entrepreneurs every year. In 2021 alone, venture capitalists invested a record amount $621 billion of startups worldwide, an increase of 111% compared to $294 billion in 2020.

In early 2020, when COVID-19 sent shockwaves around the world, many people expected venture capital funding to slow down. Instead, however, he rallied in the opposite direction and went all out to build promising startups. As a result, most industries have seen record growth in venture capital funding over the past two years, making innovation capital widely available to anyone who needs it.

Now that’s one side of the picture. The reality below the surface, however, is quite different. While many startups are thriving with VC support, the market is dropping a surprisingly large number of them into oblivion. Estimates even suggest that three out of four VC-backed startups fail.

Of course, startups fail for a variety of reasons, not all of which have to do with venture capital funding. Yet, overall, the centralized nature of the venture capital market and its collective growth-oriented attitude puts immense pressure on founders and undermines their spirit of innovation. If this continues, we could end up with a startup ecosystem that puts innovation on the back burner. The democratization of venture capital markets is therefore necessary, and one of the ways to achieve this is to open the doors to retail investors.

How the centralized venture capital market is killing startups

To understand the need for retail investor participation, we need to look at the current state of the venture capital market. As mentioned, venture capital funding is at an all-time high and readily available for promising startups. Previously, venture capital funding rounds lasted months. Companies have taken their time to review startups and ideas. However, rounds are done in weeks, and founders with good ideas can easily rake in millions of dollars. But this ease of access to capital comes at a price.

Venture capitalists have a decidedly growth-oriented attitude and are eager to recoup their investment with profits. To achieve this, they encourage startups to scale prematurely and focus on growth rather than product development. This leads to half-baked products and services entering the market in droves, focusing on short-term gains rather than long-term success. Things are fine if scaling prematurely yields a positive outcome and VCs realize their profits.

However, if things don’t go well, which they often do, venture capitalists have three ways to go. First, they inject more money into the business. Unfortunately, founders usually lose control of their business when this happens or even lose their jobs. Second, VCs buy out the startup, jeopardizing the founder’s vision. Third, the investor liquidates the startup, marking the end of all possibilities, for better or for worse.

In all three scenarios, venture capital firms focus on profit instead of providing the support needed for startups to succeed. Additionally, with the venture capital market being centralized and united, startups face similar issues wherever they go.

Provide low risk frameworks for retail investors

The VC market needs to become more inclusive for us to see any positive change in its status. Currently, the venture capital market is an elite playground, with only around 1% retail investor representation, due to its high-risk nature. VCs go all-in on the startups they back and are prepared for possible downfalls. Retail investors, on the other hand, invest for steady income growth and stable returns. As a result, they are generally risk averse and thus avoid the venture capital market.

However, without retail investors, the monopoly of large corporations in the venture capital market will continue and innovation in the startup ecosystem will suffer. Thus, the only solution is to provide low-risk participation frameworks for retail investors in the venture capital market.

With the advent of blockchain technology, it is now easier than ever to provide such frameworks and democratize markets. Blockchain technology allows millions of people around the world to pool resources and fund startups. This way, the VC monopoly ends and the founders can focus on innovation and product development. Moreover, in such a scenario, the investment made by the individual investors is low and the associated risk is equally distributed among the participants. No one bears the full brunt of the fallout, if any.

As more and more blockchain-based protocols enter the scene and reduce risk in the venture capital market, the participation of retail investors will increase and ultimately lead to a democratized space that defends the spirit of innovation.

Venture capital for the masses

For a long time, regular retail investors have focused on the 60/40 investment strategy, where 60% of the portfolio is made up of stocks and 40% of bonds. This was seen as the most balanced way for people to give feedback. However, this approach is no longer practical under current market conditions.

Investors therefore seek to diversify their portfolios by investing in all asset classes. To that end, providing low-risk blockchain-based investment products may be key to attracting the attention of retail investors. In addition to democratizing the venture capital market, this move can contribute to the creation of wealth for the masses, allowing them to capitalize on the growth of innovative and futuristic companies.

Featured Image Credit: Rodnae Productions; pexels; Thanks!

Hatu Sheikh

Hatu Sheikh is co-founder of DAO Maker, which is building the future of venture capital.