The way we raise capital can determine the success or failure of a new business idea with high-growth potential.
There’s no doubt that efficient private capital markets play a critical role in the advancement of innovation and entrepreneurship.
The way we raise capital can determine the success or failure of a new business idea with high-growth potential. But the suggestion that ‘good companies will always get funded’ is a bit of a myth.
Good companies don’t always get funded
History is littered with examples of great companies that were rejected by smart investors but have gone on to become global powerhouses.
So capital, and the way it is used, matters. This is not a fringe issue for venture capital and startup nerds. This is a critical part of the innovation debate and one that governments and economic development agencies all over the world need to take seriously.
Capital market inefficiencies
For a long time, though, the private capital markets have been anything but efficient, and this has limited the capacity for entrepreneurial ecosystems to truly achieve their potential.
The private capital markets have been fragmented, have lacked transparency, and have been a closed and elitist club. This dynamic has artificially restricted the size of the early-stage capital markets and has made capital raising unnecessarily harder for founders than it would be if supply and demand were operating properly.
The digital age’s attempt to address inefficiencies
The major first phase of the digitisation of the Wealth sector, enabled by Web1 and Web2 technology, has tried to address some of these issues.
Today, digital investment platforms have created fully automated digital investment marketplaces that facilitate the entire investment process.
People have warmed to wealth technology’s first phase, with digital investment platforms contributing hundreds of millions of dollars to the private capital markets annually and growing.
Globally, digital investment is projected to reach a staggering USD 3.84 trillion by 2027 with a CAGR of 13.08% between 2022 and 2027.
While this advancement in wealth technology is welcome, it is, in my view, unremarkable.
Wealthtech’s existing level of digitisation is simply core. It really just automates manual transaction processes and facilitates the digital syndication of capital. It doesn’t solve the market inefficiencies referred to earlier.
But this is where it gets really exciting.
How Web3 will completely revolutionise investment as we know it
In the same way that Web1 revolutionised information and Web2 revolutionised interactions, Web3 has the potential to revolutionise agreements and value exchange.
By decentralising the data structures in the internet’s backend, there is no single point of failure and no central authority controlling information. With blockchain technology driving Web3, we’ll have a tokenised internet that users and builders own.
When applied to investment markets, this technology’s benefits are highly appealing. Transaction data is immutable (i.e. tamper-proof), investment is accessible to all and transparent, costs are extremely low, transactions are fast, assets are interoperable and cybersecurity is enhanced because cryptographically secured assets are impossible to counterfeit.
At a social level, blockchain technology adoption is being driven by a global movement toward egalitarianism and greater demand for financial system accountability and transparency.
Web3 addresses these needs with open source, open platforms, portable data, greater user privacy, user controls, private keys and, at its core, community-owned and generated networks.
Recent volatility in the value of cryptocurrencies has elevated the urgency to formalise a regulatory framework for crypto assets with nations from the UK and USA to Singapore and Australia at various stages of industry consultation or regulatory reform.
The future of wealthtech enabled by Web3 technology builds upon important foundational work and enables:
● digital investment communities (effectively digitising deal origination) to more efficiently bridge innovation with capital,
● securities tokenisation and digitisation of securities registries making investor management and engagement seamless and highly transparent, and
● faster and safer secondary trading capability (built on distributed ledger technology), enabling high-growth company stakeholders to buy and sell that interest without waiting for a traditional exit event.
It’s worth taking a moment to imagine what that means.
What’s possible with Web3
Effectively, they mean founders can access ‘always-on capital’—fast, flexible, efficient bridging finance as and when they need it.
High-growth companies may never need to list or merge the business to create a liquidity event for early investors because the technology provides built-in liquidity in seconds.
For investors, greater liquidity removes major barriers to investing in private companies and that is likely to turbo-charge participation in the early-stage capital markets.
For employees and founders, liquidity means not having to wait for that one major exit event in five to 10 years’ time.
These features fundamentally restructure the power dynamics of the private capital markets. When we get to that, we will have achieved true democratisation in the private capital markets, and I am very excited about that.
Steve Maarbani is CEO of VentureCrowd