The venture capital (VC) market is undoubtedly the backbone of the global startup ecosystem, helping thousands of entrepreneurs yearly. In 2021 alone, venture capitalists invested a record-breaking $621 billion in startups worldwide—a 111% increase from $294 billion in 2020.
In early 2020, when COVID-19 sent shockwaves worldwide, many people expected VC funding to slow down. Instead, however, it rallied in the opposite direction and went all-in on building promising startups. As a result, most industries witnessed record growth in VC funding in the past couple of years, making innovation capital widely available to anyone who needs it.
Now, this is one side of the picture. The reality beneath the surface is quite different, though. While many startups thrive with VC support, the market pushes a surprisingly large number of them into oblivion. Estimates even suggest that three out of four VC-backed startups fail.
Of course, startups fail due to various reasons, all of which aren’t related to VC funding. Yet, overall, the centralized nature of the VC market and its collective growth-first attitude puts immense pressure on founders and thumps their innovative spirit. If this continues, we could be left with a startup ecosystem that puts innovation on the back-burner. Democratizing VC markets is thus necessary, and one way to do this is by opening the doors to retail investors.
How the Centralized VC Market Kills Startups
To understand the need for retail investor participation, we need to look at the current situation of the VC market. As mentioned, VC funding is at an all-time high and readily available to promising startups. Previously, VC funding rounds went on for months on end. Firms took their time vetting startups and ideas. However, the 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 with a price.
VC firms have an adamant growth-first attitude and are in a hurry to get their investment back with profits. To achieve this, they encourage startups to scale prematurely and focus on growth instead of product development. This leads to half-baked products and services entering the market en masse, focusing on short-term gains instead of long-term success. Things are acceptable if the premature scaling generates a positive outcome and VCs make their profits.
However, if things don’t go well, which is often the case, VC firms have three ways forward. One, they pump more money into the venture. Unfortunately, the founders usually lose control over their business when this happens or even lose their job. Two, VCs buy out the startup, compromising the founder’s vision. Three, the investor liquidates the startup, marking the end of all possibilities, for better or worse.
In all three scenarios, VC firms focus on their profit instead of providing the necessary support for startups to succeed. Moreover, since the VC market is centralized and united, startups face similar problems wherever they go.
Providing Low-Risk Frameworks for Retail Investors
The VC market must become more inclusive for us to witness any positive change in its status. Currently, the VC market is a playground for the elite, with only about 1% retail investor representation, due to its high-risk nature. VCs go all-in on startups they back and are prepared for potential downfalls. Retail investors, on the other hand, invest for steady growth in income and stable returns. As a result, they are usually risk-averse and thus avoid the VC market.
However, without retail investors, the monopoly of big firms in the VC market will continue, and innovation in the startup ecosystem will suffer. So, the only solution is to provide low-risk participation frameworks for retail investors in the VC market.
With the advent of blockchain technology, it is now easier than ever to provide such frameworks and democratize markets. Blockchain technology allows millions globally to pool their resources and fund startups. This way, the monopoly of VCs ends, and founders can focus on innovation and product development. Moreover, in such a scenario, the investment made by individual investors is small, and the associated risk is equally distributed across participants. No single person takes the full blow of fall-outs if any.
As more such blockchain-based protocols come into the picture and reduce risks in the VC market, retail investor participation will increase and ultimately lead to a democratized space that upholds the spirit of innovation.
Venture Capital for the Masses
For a long time, regular retail investors focused on the 60/40 investment strategy, where 60% of the portfolio consists of stocks and 40% of bonds. This was considered the most balanced way for people to make returns. However, this approach is no longer practical under the present market conditions.
Investors are thus looking to diversify their portfolios, investing across asset classes. To this end, providing low-risk, blockchain-powered investment products can be the key to drawing retail investors’ attention. Besides democratizing the VC market, this move can aid wealth generation for the masses, allowing them to capitalize on the growth of innovative and futuristic businesses.
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