Low-risk participation framework Democratize the venture capital market, attract retail investors to participate

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

In early 2020, as COVID-19 sent shock waves around the world, many expected VC funding to slow down. Instead, however, it rose in the opposite direction and poured all its energy into building promising startups. As a result, most industries have seen record growth in venture capital funding over the past few years, making innovation capital widely available to anyone who needs it.

Now, this is one side of the picture. However, the reality below the surface is completely different. While many startups thrive on VC backing, 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 for a variety of reasons, all unrelated to VC funding. Overall, however, the centralized nature of the VC market and its collective growth-first attitude puts great pressure on founders and knocks down their innovative spirit. If this continues, we could be left with a startup ecosystem that puts innovation first. So democratizing the VC market is necessary and one way to do this is to open it up to retail investors.

How Centralized VC Markets Kill Startups

In order to understand the participation needs of retail investors, we need to look at the current state of the VC market. As mentioned, Sponsoring VC is at an all-time high and is open to promising startups. Prior to that, VC funding rounds had been going on for months. Companies took their time looking at ideas and startups. However, the rounds are done in a few weeks and founders with good ideas can easily make millions of dollars. But this ease of access to capital comes with a price.

VC firms have a growth-first attitude and are in a hurry to recoup their investment with profit. To achieve this, they encourage startups to scale early and focus on growth rather than product development. This results in half-baked products and services entering the market continuously, focusing on short-term profits rather than long-term success. Everything is acceptable if early scaling produces positive results and the VCs generate profits.

However, if things don’t go well, which often happens, VC firms have three ways to move forward. One, they pumped more money into the venture. Unfortunately, founders often lose control of their business when this happens or even lose their jobs. Second, VCs acquire startups, compromising the founder’s vision. Three, the investor liquidates the startup, marking the end of all possibilities, for better or for worse.

In all three scenarios, VC firms focus on their profits instead of providing the support needed for startups to succeed. Furthermore, because the VC market is centralized and unified, startups face similar problems wherever they go.

Provide low-risk frameworks for retail investors

The VC market must become more inclusive for us to see any positive change in its status. Currently, the VC market is a playground for the elite, with only about 1% of retail investor representation due to its high-risk nature. Venture capitalists go all out for the startups they’ve returned to and prepare for potential collapses. Retail investors, on the other hand, invest for steady income growth and steady returns. As a result, they are generally risk averse and therefore avoid the VC market.

However, without retail investors, the monopoly of major players in the VC market will continue and innovation in the startup ecosystem will suffer. So the only solution is to provide low-risk entry frameworks for retail investors in the VC market.

With the advent of blockchain technology, it is easier than ever to provide such frameworks and democratize the market. Blockchain technology allows millions of people across the globe to pool their resources and fund startups. This way, the monopoly of VCs will come to an end and founders can focus on innovation and product development. Furthermore, in such a scenario, the investment of individual investors is small and the risk involved is evenly distributed among the participants. No one person takes the full blow of failure if any.

As more and more such blockchain-based protocols and risk reduction in the VC market become available, retail investor participation will increase and eventually lead to a democratized space that promotes innovation. new.

Venture capital for the masses

For a long time, the typical retail investor focused on a 60/40 investment strategy, where 60% of the portfolio consisted of stocks and 40% of bonds. This is considered the most balanced way for people to make money. However, this approach is no longer practical in today’s market conditions.

Therefore, investors are looking for diversify their portfolio, invest on a variety of assets. So, offering low-risk blockchain-based investment products could be the key to getting the attention of retail investors. Besides democratizing the VC market, this move could aid in wealth creation for the masses, allowing them to capitalize on the growth of innovative and futuristic businesses.

Featured image credit: Rodnae Productions; Bark; Thank you!

Hatu Sheikh

Hatu Sheikh

Hatu Sheikh is the Co-Founder of DAO Maker, building the future of venture capital.

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