Growing up I was always told America was the “land of opportunity” and from the time I moved here at the age of 12, I started to see how that was true. Hard work and innovative thinking could lead to a limitless sky of opportunity. I attended a college where I got to study subjects I was passionate about, and upon graduation, landed a job at one of the world’s largest systematic trading hedge funds. Opportunities seemed boundless. I eagerly got to work on helping to build quantitative investment strategies that the world’s largest pensions and endowments invested in to generate long-term returns to fund the futures of millions. Why did these institutions invest in our strategy? They believed it provided the best risk adjusted returns for their end clients. But it got me thinking, what about everyone else? After all, most hedge funds are only available to institutions and the wealthiest among us who are able and willing to write multi-million dollar checks. What about me, who was helping build the strategy, but didn’t have access to invest in it? What about my family? I felt like a chef who wasn’t allowed to eat their own food. Or share it with those I loved.
At that firm, I was lucky enough to work on a project whose goal was to take this successful investment strategy and explore ways to scale it so individuals writing smaller checks might have access. It planted a kernel of interest in my mind. Fast forward a few years when I was an early employee at a marketing technology company ready to propose to my now wife, then girlfriend. To afford the ring, I sought to sell some of my equity in that company. Despite a lengthy search for solutions, I learned that this wasn’t easy to do if you weren't in the C-suite. Another kernel planted.
Despite this promise of a “limitless sky,” I began to see that ceilings existed. Opportunities and tools for wealth creation were mostly only available to the wealthy. If you needed wealth to create wealth, how were you supposed to get wealthy in the first place? I wanted to see what might happen if more people had access to these financial tools, namely investments and liquidity in private companies. It’s a journey I’ve been pursuing for the last 10 years.
While the idea of democratizing access to the financial markets is not novel, it is relatively new when you think of the overall history of the market. It wasn’t until the 1960s that the first wave of financial advisers were established and companies like Schwab cemented themselves in the market with their commitment to affordable financial advice. Thirty years later, E*Trade and other online brokerages revolutionized the trading model, reducing costs for the individual investor. The 1990s also brought ETFs, offering diversified exposure to sectors and themes that were typically only built by and available to institutional money managers. Real progress has been made, and still there is a dire need for more access.
So what is required to make more democratization happen? There are a few prerequisites, and the first is education. Without it, individuals can risk losing it all from the latest investment fad, whether it's NFTs, ICOs or SPACs. Just because you can invest in something does not mean you should. The onus is on investment managers to educate clients on the market and build the right products and offerings to meet the needs of different investment profiles. It’s something we strive to do at EquityZen across our offerings and through our educational content. And the benefits extend beyond a given market. In the end, better informed investors create a better informed market and ultimately a more empowered society.
The second is scale. When market inefficiency makes the costs to buy or sell a given asset high, these assets are typically only available to those who can write checks large enough to bear the cost of the transaction. This is where technology is crucial. It can allow for scale, like we saw in the case for online brokerages, which allows for mass adoption. Technology is the backbone of EquityZen’s private company marketplace. Without building technology to standardize private company trading, we simply could not have the processing power to offer $10,000 investments to individuals again and again (over 37,000 times, in fact). We know that technology is opening the doors for more investors to access our market, and we’re seeing this happen in other alternative asset classes as well.
So what is the outcome of a more democratic market? It means that wealth creation is available to more people. Within the private markets specifically, we’ve continued to see companies stay private longer and raise significant capital while private. This has enabled them to grow massively while private, substantiated by the over 1,200 Unicorn companies globally that are valued at a collective $3 trillion. As the markets rally, more of this growth will continue. Private market investment access allows more people to participate in this growth and support the innovations that will shape entire global markets. Investing allows them to be on the field rather than on the sidelines. When a greater share of the population gets to participate in wealth creation, that money can flow to do some pretty incredible things.
We hear it from our clients who have put their children through college or paid off student loans with their investment proceeds1. One shareholder recently sold part of his company’s stock to send 16 kids to college! These individuals can vote with their dollars, supporting the businesses and causes they believe in. Ultimately, democratization creates opportunities for wealth creation and wealth creation allows for the freedom to make choices that align with the future you want to live.
Although there is certainly meaningful potential for returns, democratizing financial access is not just about returns, or “doing the right thing”. It’s also good for the overall market. Larger markets with more participants warrant more scrutiny, which leads to more information and ultimately better decision making for investors. In smaller markets it’s easier to have folks who operate in the shadows. Larger markets beget more standardization, above-board behavior and market efficiency. I think back to the earlier days in the secondary market when the majority of brokers conducted synthetic trades unbeknownst to the private companies themselves. It allowed a long-term minded business like EquityZen to differentiate itself by only working on company-approved transactions. When companies are on board with secondary transactions and work with buyers and sellers, better outcomes can be achieved for all parties involved and more thoughtful solutions can be built. Systems where the masses can ask questions and act on that information have a better chance of succeeding. Broadened access helps enable this transparency.
The good news is that in many markets, democratization is happening now. You see it the growing push for ESG transparency and investments that lower our global carbon footprint. You see it in the growing number of tools and platforms available to enable grassroots movements. At EquityZen, I see it in each new investor or shareholder that signs up on our platform and gets to experience the power of the private markets and the power of individual opportunity. The kernels that were planted over a decade ago have sprouted. And I believe they are just seedlings for what’s to come over the next ten years, namely more access for more people. This is what excites me and drives me during the inevitable tough days or weeks that we all face, and I’m thankful to be playing my small part.
- These individual investors' may not be representative of other investors' experiences, and they do not guarantee the future performance or success of any EquityZen fund investment.