Boom in retail investors could accelerate blockchain startup growth

According to research from Vanda, retail investors have poured $400 billion into the stock market since 2020. This represents twice the number of shares they have bought in all of the past years combined. Traditionally, retail investors who are financially vulnerable and risk averse have steered away from risky asset classes and stuck to the 60/40 investment strategy. However, the scenario has now changed.

On the back of fintech and blockchain technology, retail investors are now marking their presence in new areas. Fintech apps made it easier for retail investors to access the stock market, introduced zero-commission 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 US-based investors are likely to switch banks if their bank does not support their preferred fintech application.

Blockchain technology, meanwhile, democratized financial markets and lowered their entry barriers. Asset classes such as securities, derivatives, stocks, debt and commodities, which were previously outside the realm of retail investors, are now readily available over the blockchain, thanks to asset tokenization. Blockchain-based protocols have recently opened venture capital doors for retail investors. And their entry into the VC market is a revolution that has the potential to drive the startup ecosystem.

Retail investors in the startup ecosystem: Where do they fit in?

Funding startups has always been venture capitalists’ forte. In fact, the VC market is considered the engine for innovative startups. But this space is mainly occupied by institutional investors; retail investors make up just 1% of this. This leads to a number of problems. The dictatorship of institutional investors over the VC market puts startups in a stranglehold. And according to TechCrunch, VC kills more startups than slow customer adoption, technical debt, and co-founder infighting do—combined.

Why? Simply because VCs operate with a fierce growth-first attitude and are more concerned with their own welfare than the welfare of startups. VCs take big turns and want big payouts very quickly. So founders are forced to scale and branch out prematurely. They get minimal time for innovation, product development and branding. Also, the founders’ stake in the business is heavily diluted by VCs. Founders are lucky if, at the end of the financing rounds, they still have 20% of the ownership.

At the end of the day, if premature scaling results in failure, VCs buy out or spin off the startup. Both outcomes kill the vision and mission of the founders.

With retail investors in the picture, institutional investors’ monopoly ends and the VC market is democratised. 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 sounds.

Retail investors’ entry into the start-up space: obstacles and solutions

As mentioned above, private investors are traditionally risk-averse and, unlike VCs, do not take large swings with their money. Retail investors also lack the capital to fund startups themselves and the knowledge to carefully evaluate potential startups. These factors can hinder their entry into the VC market, again leaving startups at the mercy of VCs.

Enter blockchain-based incubators and accelerators. These platforms provide the necessary on-ramp for retail entry into the VC market, bypassing the hurdles. Blockchain-based incubators and accelerators foster promising startups from the ground up and equip them with the essential tools and strategies to succeed. So basically the process of investigating is already done. These platforms have expert entrepreneurs and advisors who can recognize the startup’s potential. Now all that remains is to connect these promising startups with retail investors.

This can be done by promoting global fundraising campaigns and allowing many private investors to pool capital to fund start-ups. In this way, the low capital problem 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 entire fall.

In other words, the entry barriers for retail investors have been significantly reduced. And if NFTs underpin these fundraising campaigns, the barriers go even lower. NFTs have recently emerged as the most popular and sought after asset class. NFT collections containing the company’s dividends, board voting rights and other premium features can easily interest retail investors and integrate 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 Marvel, DC and Heavy Metal are quickly jumping on the NFT bandwagon to get fans on board with the digital revolution.

In conclusion, blockchain-based accelerators that conduct global fundraising with NFTs at their core could bring an influx of retail investors into the VC space. And this mass influx of small-dollar investors could prove instrumental in the continued development and launch of high-potential startups.

Democratization of the startup ecosystem is the way forward

With blockchain technology increasing in popularity and value, major industries worldwide are looking to decentralization as the way forward. From finance and entertainment to the internet and social media, a paradigm shift in power dynamics is underway, taking control from central institutions. Naturally, the startup ecosystem follows suit.

Lowering barriers to entry and bringing retail investors into the startup space ensures that innovation thrives and founders have the freedom to build and scale at their pace, driving the growth of startups over the long term.

Gaurav Dubey is the CEO of TDeFi.