DAOs Will Disrupt Venture Capital
Decentralized Autonomous Organizations, or DAOs, have recently risen to stardom because of unique projects like Constitution DAO and Links DAO. Who would’ve thought a random group of people could unite under an online contract and attempt to buy the US Constitution? And this is merely just scratching the surface of what DAOs are capable of.
What is a DAO?
A DAO is an organization represented by rules encoded as a smart contract that is transparent, controlled by organization members and not influenced by any central entity. In simpler terms, they are member-owned, blockchain based communities without centralized leadership.
In the past year, DAOs have gained enormous traction, surpassing 2 million members, up 150-fold from just 13,000 members last January, according to DeepDAO.
Now they are organizing in an effort to deploy capital into Web3 startup companies and projects, likely disrupting the venture capital funding model which has financed new waves of technologies for decades. DAOs focused on Web3 investing are becoming the new arena for sourcing deals, meeting founders and ultimately cutting checks — all functions that are typically done by seasoned venture capitalists who pride themselves on their industry prowess. The VC model has long been exclusively for accredited investors and others who are capable of writing hefty checks. Web3 aims to democratize startup investing and grant access to those who never had such access.
Investment DAOs
Enter Investment DAOs- which are collectives of Web3-enthused individuals who are capable of investing their personal capital and appropriating portions of the DAO’s treasury into early-stage Web3 startups/projects.
Typically, membership in an investment DAO involves an upfront buy-in/fee in the form of the DAO’s governance token in exchange for access to the private community which includes gated Discord chats, Telegram groups, IRL events and more — where deals are sourced and checks can be written.
A prime example is Global Coin Research (GCR), who has cumulatively invested in more than 35 deals, deploying over $30 million into projects such as blockchain interoperability protocol Aurora and Web3 management platform Coinvise. As of December, GCR estimates its investments have seen average returns over 40-fold for projects that become liquid or marked to market.
“Crypto has allowed micro VCs to really thrive, because the return on investment on blockchain projects can be in the thousands of percent,” said Michael Steinberg, founder of venture capital firm Reciprocal Ventures. This means that smaller investment DAOs that only raise a few million still have a fair shot at earning outsized returns which could lead to raising even larger subsequent DAOs.
Benefits of a DAO
Founders can greatly benefit from their interaction with a DAO. This includes receiving product feedback, advice from Web3 natives, access to an extensive professional network and so much more.
Raising funds from investment DAOs “helped us in bootstrapping our own community by on-boarding new members through co-hosting events with GCR,” said Jenil Thakker, founder of Coinvise, who has worked with both GCR and The LAO, another investment DAO. “More broadly, investment DAOs offer access to a much wider network of people that can help projects get early feedback.”
For Coinvise, a DAO infrastructure company, GCR helped the startup with product testing, including using the Coinvise platform to launch its GCR governance token.
It’s becoming an absolute norm for founders to need a community when they fundraise. It proves not only the Founder’s ability to inspire others but portray the innate need for the product itself. DAO’s often fast track this community building for its portfolio companies, yet another strong advantage they have over VCs.
Most investment DAOs even offer media, hiring and legal services to support their portfolio companies.
A traditional VC could never compete with these offerings because it’s highly capital intensive and not scalable.
A Hybrid Future
As cryptocurrencies have grown above $2 trillion in market capitalization, investor capital has been avidly chasing the booming industry’s outsized returns, leading to the formation of several prominent investment DAOs with diversified flavors. These include BitDAO, which maintains a $2.5B directed treasury, and most notably FlamingoDAO, which focuses on solely on NFTs (Worth over $1B).
This trend raises the question of whether DAOs will eventually encroach on, or even one day, replace traditional venture capital.
“It’s possible,” says Reciprocal’s Steinberg. However, “crypto venture capital is a full-time job. VC firms are generally very active, highly engaged, and have lots of time and resources to devote to portfolio companies. We’re all for partnering with DAOs, but some founders need playbooks.”
“I definitely view their power increasing over time,” Third Prime Capital’s Christian Kaczmarczyk told CoinDesk. “The venture firms who work with DAOs will be successful in the long term.”
Most venture capitalists say the DAO investment model is still underdeveloped compared to traditional VCs in terms of execution, operational capabilities and efficiency. However, the forward thinking VCs are intently following the space, looking to preemptively invest/partner with leading DAOs.
“As far as I’ve seen, projects value DAOs for the strength of their individual members and capacity for useful partnerships, but still overwhelmingly prefer traditional funds to lead rounds,” said Kyle Wang of Valhalla Capital, who is also an avid investor in various investment DAOs.
As DAOs continue to gain increasing market share on startup cap tables, a hybrid model appears to be taking shape on the horizon, combining the community-driven ethos of DAOs strategically with the deep pockets and seasoned expertise of venture capitalists.
“There’s room for more centralized investors alongside the extremely democratized investment syndicates, similar to how FTX and Coinbase are viewed alongside Uniswap as liquidity venues,” said Evan Feng, head of research at digital assets venture firm, CoinFund. “There’s room for hybrid approaches as the boundaries between the two camps blur further.”
Investment DAOs also carry with them risks associated with cryptocurrencies in general, such as regulatory scrutiny, mismanaged DAO treasuries or flaws in untested tested technologies.
But in a crypto bull market, it’s the startup founders who ultimately have the power when it comes to the types of investors they want to work with.
At the end of the day, Entrepreneurs should choose investors which most align with their vision and give them the greatest chance for success. As Web3 continually develops, DAOs seem to be quickly advancing as the front runner.
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