One startup trend that’s been quite intriguing over the past year is the emergence (or re-emergence depending on how you see it) of the “democratization of investing.” While retail investors can buy stocks and bonds, access to alternative investment assets has been largely cut off, leaving exposure to alpha on the table. Why should ordinary Americans get left behind with opportunities to build generational wealth? The first wave of this promise of democratization circled around real estate with companies like Yieldstreet, Fundrise, RealtyShares, and Cadre chopping up real estate investing in a few different ways.
The trend I’ve paid attention to this year works with asset classes that one wouldn’t consider as “assets” in the financial sense at first glance. Examples include classic cars, art, eSports teams, sneakers, etc. Companies I’m keeping an eye on include RallyRoad, Otis, and Arthena. Intuitively, it starts to make sense. These are theoretically appreciating assets, so investors should be able to capture value. RallyRoad and Arthena are starting with one asset (classic cars and art, respectively) and then plan to move horizontally across vertical. Otis is building a brand around “culture as an asset” and offering many options to begin with. The operational mechanisms are similar. The brand or startup purchases an asset, securitizes it, and then offers shares for a fraction of that asset to investors on the platform.
While the dream to democratize investing is certainly laudable, members of the investment community have criticized features of the real estate investment platforms that came online a few years ago. They believe there’s a significant operational benefit for a building to have 1 owner vs. 100. Furthermore, some say that these digital markets suffer an adverse selection problem. The Blackstones of the world will swoop up the prized real estate assets before any of these platforms see them, which impacts the selection pool. You can go back and forth on these issues, but I do see the point.
With regards to the alternative assets advertised on some of the newer platforms, I do have a few questions:
- What does data-driven investing mean? How do you scale investment operations?
- What does liquidity mean for the value of the asset? What happens when there’s a secondary market for shares in a classic car?
- Is it easy to scale best practices across different types of alternative investment assets? Although it sounds a little ridiculous, what are the similarities and differences between investing in a solar farm and in a pair of shoes?
I bring up these concerns because I’m genuinely curious. I do want to see these new types of investment platforms succeed because I believe they’re a net positive for retail investors.
This post was part of a larger series I wrote at the end of 2018. You can check out the other ones here. If you’d like to get in touch, you can reach me at aashaysanghvi[at]gmail.com.