Democratizing Venture Capital Investing

For too long, the venture capital industry has been limited to a select few.

But thanks to new platforms that are democratizing investment opportunities, investors of all sizes now have a chance to participate in funding and building new venture companies.

I’m excited because it opens up a whole new world of opportunity for wealth creation as well as collaboration and innovation to tackle big problems and accomplish meaningful goals.

To make the most of these new possibilities, however, it’s important to understand what’s happening, how we got here, and most importantly, where this is all heading.

Why Wasn’t Venture Capital Always Democratized?

Venture capital arose out of frustration with earlier finance systems.

Wall Street controlled the banks, but because they based their investment decisions on EBITDA, trailing earnings, and so on, they couldn’t fund the future. Innovators and entrepreneurs got tired of these limitations, so they created their own system.

That's how the venture capital world was created.

You can sit across from someone over coffee and understand that they’re smart and have a good idea, and you can fund them without going through banker applications.

Unfortunately, this quickly became a fairly closed and limited system.

That was due, in part, to a natural localization of relationships around Silicon Valley, but it was also entrenched by policy.

The SEC decided it needed to protect small investors, but protection became exclusion.

The belief was that mom and pop shouldn’t be allowed to invest in early-stage companies because they probably didn't know what they were doing. It'd be too easy for them to be tricked.

So, the SEC took the easy route and made a blanket policy that if you were a millionaire or above, then it was OK for you to invest in companies because you should know better. But for decades, everyone else was shut out.

How The Financial Ecosystem Got Disrupted

Retail investors were still able to see decent returns in the market. But in recent years, the game has changed.

The policies designed to protect smaller investors have begun hurting them. When companies started going public with massive valuations, Wall Street stopped getting the IPO pops it used to see. But all the mutual fund people were counting on and depended on that 11% a year.

So, Wall Street started shifting money into earlier-stage companies in the venture capital world, driving up valuations and destroying the checks and balances that had made the ecosystem work.

As a result, individuals now essentially invest in these early companies but don’t get the real benefit, because their investments are funneled through their Wall Street-based funds.

And the only thing stopping them from investing directly into young companies has been the rule requiring a high net worth, until now.

Equity Crowdfunding Fuels Democratization Of Investing

That rule changed in 2016 under the JOBS Act and ushered in a new type of investing process called equity crowdfunding.

This allows anybody to invest directly in new companies and receive equity, as long as the company has filed the right documents and received SEC approval.

Companies register on regulated online platforms and create profiles that include information about their idea, history, leadership, financials and more.

This new industry is quickly gaining momentum.

StartEngine, a leading platform, reports a jump from a $60 million valuation in June 2018 to $768 million in August 2021, with a stated goal of helping young companies raise over $10 billion by 2029.

Equity crowdfunding allows massive democratization of the startup world. It’s a complete game-changer for the individual investor. To be a part of the next Facebook on day one could bring a 15,000-times return. Who wouldn’t put in a few hundred dollars for that?

Now anyone can, and as the industry matures, we’ll likely start seeing funds and other initiatives to make it safer and add additional opportunities.

There’s even a TV show called “Going Public,” which tells founders’ stories and lets viewers click to invest.

The Democratized Future Of Ideas

What’s most exciting about the emerging future is that opening these new investment avenues leads to a democratization of ideas. Visionaries now have the chance to get a crowd of supporters energized about a new venture and invite them to be part of bringing it to life with a small investment.

For entrepreneurs, this is immensely more powerful than going up and down Sand Hill Road in Menlo Park at the early stage.

The venture capital world is great for a validated company, but for a variety of reasons, many great new ideas don't get off the ground.

Why take a young, fragile, little idea and show it to the world that’s designed to throw rocks at it?

Instead, founders can now work with a crowd of supporters at the earliest stage to shape and develop their idea to the point where it has substance and proof of concept.

Then it’s de-risked, has a higher value and is ready for venture backing.

Even better, this crowd support can extend beyond funding into gathering the teams and talent that will breathe life into the idea, provide feedback and insights and help share it with the world.

And as a greater variety of founders develop their ideas with new types of early-stage funding, it opens the door to a broader array of vetted opportunities for venture capitalists as well.

It’s an exciting time for creators, visionaries, entrepreneurs and everyone who, like the first venture capitalists, feels tired of exclusion by the status quo financial system.

And this is only the beginning.

As transformative technologies and social trends converge, many other paths of democratization are emerging.

Mark S. McNally is the founder and chief nobody of Nobody Studios, a globally distributed high-velocity venture studio bringing together investors, founders and creatives to forge companies with purpose, real-world value and a human connection. For more information, visit www.nobodystudios.com.