Are you ready to hear the truth about venture capital? Nobody Studios’ Founder and Chief Nobody, Mark S. McNally spills the beans in his article in International Business Times. Here’s a preview:
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.