Private Equity in Your Pocket: How Digitization Changed VC Investment Marketby@rickyrathore
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1,340 reads

Private Equity in Your Pocket: How Digitization Changed VC Investment Market

by Ricky RathoreApril 18th, 2022
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In 2020, Americans spent an average 4 hours and 15 minutes on their mobile phones daily. On average, every phone had 40 apps installed (millennials had 67). The trend towards the democratization of investments spurred by Robinhood is already going beyond the stock market. The number of "unicorns" — private companies valued at $1 billion or more— is rapidly growing in the U.S.

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Today we can’t imagine life without our phones: we use them to order goods, learn news, play, and even find partners. The same goes for making money: a smartphone has become a popular way to invest.

In 2020, Americans spent more than 4 hours on their mobile phones daily in average screen time. On average, every phone had 40 apps installed (millennials had 67). Now just count how many apps you have installed.

The stock market on your phone

Investments are a mass phenomenon in the U.S. Since the early 2000s, 50-60% of adults have been investing in the stock market, and this number has been pretty steady. But until recently, people didn’t invest themselves – brokers did all the work. They consulted them on what to buy and offered ready-made investment products.

Typical pit trading in the old days: traders did the actual buying and selling on the physical exchange floor in open outcry.

This paradigm was shattered by Robinhood. In 2015, Robinhood introduced a mobile app for trading on the stock market, with the simplest possible interface that lets its users buy shares with a couple of clicks. The seemingly small change upended the approach to investments: investors can build their own portfolio, control it, and analyze market information. And it is almost as easy as ordering food or having a shopping spree on Amazon.

Robinhood focused on attracting a large number of young investors with little capital and no serious knowledge of the stock market. Between 2019 and 2022, the app's customer base soared from 10 million to more than 22 million users. A significant portion of Robinhood's customers is millennials, with an average customer age of 31.

By changing the approach to the investment process, Robinhood affected the fundamental rules as well. The trading market was immediately swept by young retail investors with little experience who wanted to get their own share of the “pie”. A vivid demonstration of their success was proven by the coordinated short-squeeze of Gamestop stock and several other companies in early 2021 by Reddit users in a group called WallStreetBets, members of which used Robinhood as a tool. This orchestrated effort reversed the market trends.

Investments that will quickly grow tomorrow

The trend towards the democratization of investments spurred by Robinhood is already going beyond the stock market. Investors need to look for new sources of rapid growth for their investments, and, judging by all appearances, the VC market is next in line for digitization – first of all, it will affect large private companies.

Previously, the VC investment market was quite narrow. Young private companies lacked the volume of capital from private investors: to scale up their business, they had to go public and raise capital through the stock market.

Today the situation in the private market has changed: the number of "unicorns" —private companies valued at $1 billion or more— is rapidly growing in the U.S. These companies have achieved top business indicators, comparable to leading public companies, over a few years. Stripe, Instacart, Chime, Discord, and other major private companies are in no rush to go public and continue to raise funds on the private market.

Take SpaceX, which heralded a new era of private companies, by upending such a capital-intensive industry as space exploration without resorting to a public offering for capital. By the fall of 2021, the company's valuation reached a whopping $100 billion, which earned SpaceX the nickname "centiсorn". In 2021, the company had three funding rounds amassing $1.5 billion in total. In one round alone, SpaceX raised $850 million. Two years ago, such sums would look fantastic to the VC market.

Investors' profits in the private market are formed differently than in the stock market. The revaluation of a private company usually occurs following the results of its latest funding round. The brighter prospects the company has, the easier it raises funds, and the faster its business develops. It is a closed cycle.

The company can have as many rounds as it wants, and if your investments are kept for at least a year, you can increase your capital many times over. In this case, why haven’t we all become venture capitalists already?

The problem is that until now private equity investments have been a turf of major investors, specialized funds, and private investors with huge capital. The entry thresholds to such investments are too high, and the investment process is complex and convoluted even to a professional investor. However, this market, too, is undergoing democratization.

Soon, platforms that operate on principles similar to those of Robinhood in the stock market will be able to provide easy access to private equity. One of the first private equity investment apps, Dizraptor, can already be downloaded from the App Store and Google Play. Its example shows how the VC market can be “packaged” into an app "for everyone".

How venture investment looks like to user

Dizraptor’s users go through the whole cycle of investing in one mobile app: from selecting a company and signing the necessary documents to getting the results. **

By tapping on the Offerings section, you can see current investment offers, see information about the company, the terms and structure of the deal, andclick on the "Invest" button.

The dynamics of your investments and approximate return can be tracked in the Portfolio section. The main scenario of completing an investment in a private company is exit, the company’s public offering. After that the investment shuts off and investor receives money into his account.

The section How It Works informs you on how investments through Dizraptor are arranged, on the risks, commissions and restrictions. For example, now Dizraptor's offers are accessible only to accredited investors, those who have $1,000,000 in their bank account, or those whose net profit within the past two years exceeded $200k per year.

How venture investment looks like in actuality

While there are nice investment apps popping up around the world, the inner kitchen of the investment world has not yet changed – at least not all of it. The user-friendly facade of fintech apps hides complex markets.

This is how the inside of Dizraptor app looks, behind the "Invest" button.**

All deals in the app are made through a subsidiary legal structure – SPV, which simplifies private equity investments and allows people with relatively small capital to legally invest in private companies.

By investing in a private company via an SPV, you become a member of a fund, which acquires stock in this company, and you own a share in assets of that fund in proportion to the amount invested. A separate SPV is set up for each investment idea, each SPV has a manager and administrator who conduct the affairs of the fund. All transactions are registered with the SEC.

Similarly, the venture investments market, until recently a closed and intimidating territory with complex multimillion-dollar deals, can "fit" into any smartphone.

How to determine your future through a phone

Robinhood app's name perfectly reflects the idea of "hacking" the stock market and allowing ordinary people to make money by investing. While Dizraptor's name seems to answer the next question "Which is best to invest in?"

Amid the already familiar and shrinking profits market of public companies, it is disruptors — private companies introducing breakthrough tech — that are changing the way we see and interact with the world.

Neurochips, metaverses, robots, and new green food are all being developed by private companies. This includes many major tech pioneers who have already proven themselves in the market and will become new leaders in their industries tomorrow.

This is probably where the ideological boundary is drawn between stock and VC market investments. It's one thing to select common stocks on a stock exchange purely for the sake of profit. It is quite another to invest in SpaceX, genuinely supporting private space exploration and at the same time benefiting from the rapid development of technologies.

Such investments are already grabbing the attention of retail investors. You can already invest in private equity in a mobile app. And very soon, with further simplification of access to the VC market, people will start massively investing in new technologies and shape the image of tomorrow.