Despite some revitalization in the investment landscape in Q1 2024, securing investments, especially at the very early stages, remains challenging.
That said, there is a growing category of investors that is still not considered by many founders as a potential source of funding — retail investors.
By this, I mean nonaccredited investors who face many restrictions when investing in startups but are often ready to fund projects they find interesting.
However, attracting money from retail investors has its peculiarities.
Competing with the public markets
First, retail investors have many public market opportunities, which is not always an advantage for founders.
Fintech progress has expanded opportunities for investors. Furthermore, the rise of robo-advising and analytics platforms provides them with ongoing advice regarding where to invest, how to do it, and why.
The challenge? Retail investors now have an abundance of information that creates overload and confusion, making it difficult to identify value opportunities. As a founder, the likelihood that they will choose your startup is not very high, so you will have to be very convincing for them to choose you
Limited tools
Second, if retailer investors choose to invest in startups, the tools to do so are still limited.
Investment platforms such as Republic and Wefunder or crowdfunding platforms like Kickstarter or Indiegogo are well known and generally the first and most popular option.
However, more experienced investors know that these host the highest-risk investment categories and rarely feature more mature companies. Venture capital trusts are another alternative, although, as of now, they only exist as a legal vehicle in the United Kingdom.
Additionally, a relatively new option is tokenization. Although many retail investors, as well as founders, might not be familiar with it, tokenization holds significant potential, since retail investors’ investment in digital assets is not particularly restricted. Therefore, you can digitize shares in your company using a blockchain protocol and offer them as tokens.
Regulatory and other limitations abound
Attracting retail investors to a private company has its limitations.
Legislation usually protects retail investors from risky investments such as startups. While developed markets such as the United States, Europe and Israel are moving toward expanding opportunities, a radical change in restrictions is not expected in the near future.
The second limitation is the check size. Under present regulations, you can raise no more than 5 million USD or EUR through a crowdfunding platform. If you have a late-stage or capital-intensive startup, this is not a suitable option.
Retail investors seek a narrative
Venture capitalists are emphasizing numbers more than ever, in addition to requiring a working minimum viable product, a refined business model, a low burn rate, and good traction.
Conversely, retail investors often pay attention to a compelling story.
Therefore, be prepared to appeal not only to their minds but also to their hearts, and most importantly, diversify your agenda — people are different and will make decisions based on their values.
This is particularly relevant for Generation Z, which is gradually becoming an active part of the business community. Hence, work on your company’s image and emotional appeal.
Final thoughts
Amid a challenging venture capital landscape, retail investors offer a yet-untapped potential pool of capital, and leveraging it could transform how startups fundraise.
Nevertheless, important attention needs to be paid to all the particularities of the retail segment. Unlike conventional VCs or angels — who invest in startups as a profession — retail investors have other factors that influence their decision-making.
Additionally, expectations must be reasonable. It is near to impossible that a single retail investor will match the check of a VC. By understanding its characteristics, you can boost your fundraising prospects.
Mila Khrapchenko is the co-founder and co-CEO of Ameetee, a fintech startup that provides a B2B solution for investing in private companies through transferable securities. She is an investment professional with more than 20 years of experience, managing a portfolio of approximately $2 billion, and an angel investor involved in more than 30 deals.
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