By Rayol Hwang is the CEO of Hillstone Partners
Exclusivity means limitations. Rarely a desirable quality, exclusivity in the financial world is a step away from the aim of an inclusive financial system. One facet of a global business that lacks ease of access is the space of venture capital. It is now a setup limited to the ultra-rich and institutions with voluminous financial backing.
Meanwhile, this exclusivity has spelled trouble to the startup ecosystem. From sacrificing sustainability for better returns to unethical takeovers, the dark side of venture capital is evident. Without any concrete alternative, it is time for the venture capital sphere to embrace the participation of retail investors for its growth.
The Current Landscape of Venture Capital Market
In 2020, the venture capital market reached new heights with more than $300 billion worth of funding taking place in the market. Startups in the tech and healthcare industries saw a huge influx of capital. While the numbers seem optimistic, the qualitative factors are being overlooked.
Stating the obvious, venture capital has suffocated more startups into oblivion than concerns like poor management or lack of planning. Once financial capital is injected into a venture, the owners are under the compulsion to focus on scaling rather than sustainability. This is the tipping point for most ventures as premature scaling is a recipe for disaster.
Entrepreneurs often fail to realize that more money does not equate to lesser problems, but mere amplifying of the business’ current operations. Both the USPs and the bottlenecks amplify, thereby negating the benefits of cash injections.
And when equity is involved, the venture capitalists hold enough clout to demoralize the current operations before taking over the business. Exactly why buy-outs and M&A (merger and acquisition) activities have grown in line with the evolution of the venture capital market.
In a market where leverage is paramount, new-age entrepreneurs are succumbing to the financially stable VCs. And since the venture capital market is limited to similar parties, it is grossly discouraging for entrepreneurs to scale their businesses. Rightly why it is imperative to open the market for retail investors to park their money in support of these ventures.
Lack of Opportunities and Platforms for Retail Investors
As mentioned earlier, there exists minimal access for individual investors in the venture capital market. First of all, venture capital is more than just injecting money into the business. It requires a substantial amount of resources and time to zero in on what the investor perceives to be the next Microsoft or Google, before loosening their wallets.
A crucial element of the venture capital sphere is the concept of due diligence. It delves into the nitty gritty of the startup, its revenue model, competitors, and every factor that contributes to its growth. From growth potential to risk mitigation plan, due diligence clarifies the potential future of the firm. Retail investors, thanks to a lack of experience and resources, find themselves unable to conduct due diligence.
Retail investors are also limited by geography as their investments are bound by several regulations which render cross-border investments infeasible. Institutions, with their subsidiaries, bypass this limitation and enjoy a free playing field to invest in ventures of their choice across the globe.
At this juncture, there is a definite need for a platform that supersedes these processes and provides an investment window for retail investors to cherish a slice of the equity pie.
Retail Investors Have Two Weapons; Blockchain Tech and Crypto
Most industries are adopting blockchain tech to streamline their operations with a touch of transparency and decentralization. These serve as the exact ingredients needed to bridge the gap between retail investors and the venture capital market.
Using smart contracts and tokenization, venture capital can be made accessible to all retail investors. And adopting cryptocurrencies as a token of value and ownership eases the process of investment. Given crypto’s ease of access, the threshold for investment is low and mitigates the traditional requirement of huge initial investment amounts.
This also benefits the entrepreneurs and venture owners as their financing efforts are automated and made simpler. It helps them get rid of 100s of pitch decks and an unimaginable time in front of the screen presenting metrics to validate their idea in front of the super-rich.
The influx of retail investors provides a fresh lease of life for the venture capital market as it reduces the age-old wielding of power by institutional investors. With no intermediaries, retail investors have direct access to the wholesome information of the venture. This removes the culture of information inequality prevalent in today’s market.
Retail Investors are the Future
The venture capital market is yet to mature from the cartel of financing companies and institutional investors. And to break through the monotony, opening the market to retail investors is the right step forward. Their influx is imperative to sustain the market’s health.
With retail investors, the market is blessed with flexibility as their volume supersedes any scope of collusion or dominance. Even the entrepreneurs face no undue pressure to scale their businesses and can focus on sustainable growth.
For the retail investor revolution to materialize, blockchain tech and crypto have a major role to play. Their ability to democratize the venture capital market and remove the barriers of entry is vital. And when it happens, tomorrow’s Apple or Microsoft shall be the result of a plethora of retail investors who pooled their trust and money in the venture.
About the author: Rayol Hwang is the CEO of Hillstone Partners, the first global M&A company in Korea. Hillstone Partners is about to launch Hillstone Finance, a project which leverages blockchain technology into the financial industry to provide investment opportunities that are inaccessible to individual investors. Hillstone Finance is the world's first asset-backed cryptocurrency that aims to eliminate barriers to entry in finance.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.