We have seen strong adoption of crypto-based systems this year, including decentralized financial applications (DeFi), non-fungible tokens (NFTs) such as digital art, cryptocentric gaming, and increasing adoption of cryptocurrencies as a means of investment and payment. One of the most recent developments is the emergence of decentralized autonomous organizations (DAOs).
DAOs have been around since 2016, when the DAO organization, a new form of investment vehicle that attracted a significant portion of the Ethereum (ETH) tokens, raised more than $ 150 million at the time. Many saw the DAO as the ultimate form of human coordination. However, due to a re-entry exploit, hackers stole $ 50 million of the organization’s funds.
Despite the initial setback, DAOs have seen a second birth in the past few months. This was primarily made possible by more sophisticated frameworks and tools as well as less friction in setting up a DAO and working with DAOs. Some early experiments like DXdao, DAOStacks Genesis DAO or MolochDAO paved the way for a new wave of decentralized organizations. Today, DAOs come in a variety of shapes and forms, from large to small, that are used to manage ecosystems, collectively buy NFTs, or contribute to social causes or movements.
Additionally, DAOs are likely to be the most fundamental change in how venture capital funds (VC) work. Venture funds need to change how they invest in projects, how they interact with them, and how they create value. At the same time, however, their own business model could be disrupted by DAOs, which themselves become investment vehicles. But Web 3.0 will also fundamentally change access to investment opportunities and enable democratic forms of investment without having to be an accredited investor or without restrictions on net worth.
How VCs Invest in Web 3.0
It is no longer an anomaly for venture capital funds to invest in Web 3.0. These investments range from setting up specialized crypto funds to more traditional (institutional) funds that recognize the potential of blockchain-based ecosystems. However, the investment approach differs from traditional venture capital.
Most notable is the widespread introduction of public sales (such as initial coin offerings, initial decentralized exchange offers, and initial exchange offers). These democratize access to investment business and enable a larger number of investors to participate in an investment round with reduced entry barriers and coordination efforts. Many Web 3.0 projects are also primarily controlled by a community-run DAO, with investment decisions being reviewed through a community vote – perhaps the best-known example is SushiSwap’s strategic fundraising campaign.
So while investment deals are traditionally often concluded behind closed doors with little or no participation by interest groups, VC funds in Web 3.0 have to be much more publicly involved in order to get a seat at the table. However, Web 3.0 projects still sometimes participate in a smaller private fundraiser before a public token sale. This is often a SAFT agreement (or SAFE agreement plus token options) with the party planning to issue a new token. However, this often includes the obligation to apply longer blocking or blocking periods.
But in the NFT sector in particular, it remains to be seen how VC funds can gain an advantage over private investors, since NFT collections are usually immediately sold to the public and there is no possibility of participating in private pre-sales.
Related: Airdrops, DAOs, token issuance, and public domains are the next frontier for NFTs
How VC Web 3.0 can add value to projects
There is a whole range of services and support that VC provides for startups – beyond pure capital. VC funds regularly support their portfolio companies with recruiting, marketing, mentoring, legal advice and other services. After all, they have a great interest in the success of these startups and want to do everything possible to support them.
However, Web 3.0 will fundamentally change what “smart money” means for projects. DAOs often do not have a central point to which these additional services can be granted. Instead, VC funds that support the projects often do so primarily through social engagement. This includes representing the interests of the community or being directly involved in local government processes. But it also includes lobbying and other forms of interaction with stakeholders outside the immediate ecosystem or even Web 3.0, as these discussions are often challenging for non-legal organizations.
A prominent example of a VC fund that relies on this new form of value proposition is Andreessen Horowitz (a16z). With the 2.2 billion dollar Crypto Fund III, a16z does not shy away from actively participating in the governance of its portfolio projects such as Uniswap.
Venture capital finance has been around since the 1940s and was mainly used by the wealthy. Since DAOs represent the next generation of VC financing, VC funds not only invest in and participate in DAOs, but become DAOs themselves. Stacker Ventures is an example of how a VC fund becomes a DAO trying to democratize early stage investments in emerging assets. BitDAO, a protocol managed by BIT token holders, is one of the world’s largest DAOs focused on providing open finance and a decentralized, tokenized economy.
Working with leading protocols, BitDAO is building a future of finance that hopes to support DeFi, DAOs, games, and NFTs. PleasrDAO, an investment and art acquisition platform, collects digital art that represents and funds important ideas and movements cemented in the chain as NFTs. PleasrDAO is experimenting with digital ownership and art ownership, helping to change the way people can invest in art.
Related: DAOs will be the future of online communities five years from now
VC is primarily a social investment tool to coordinate resources around a common investment thesis. And Web 3.0 will enable innovative new ways in which people come together to pool capital and other resources that go well beyond the rigid structures of the current VC landscape.
Venture capital in an identity crisis
Traditional venture capital funds need to monitor these developments and get a clearer picture of their own value proposition for Web 3.0 projects. Most importantly, venture capital needs to demonstrate how its value differs from community-driven investment DAOs. It could very well be that, over time, some traditional VC funds will choose a DAO structure to make their investment activities more accessible, transparent, and community-oriented.
It is clear that venture capital cannot simply stick to the existing structures and processes if it wants to remain relevant in this new era of Web 3.0.
This article does not provide investment advice or recommendations. Every step of investing and trading involves risk, and readers should do their own research when making a decision.
The views, thoughts, and opinions expressed herein are those of the author alone and do not necessarily reflect the views and opinions of Cointelegraph.
Lukas Schör is the product manager at Gnosis Safe – a wallet with multiple signatures and a platform for managing digital assets on Ethereum. Lukas has been working in product-related roles in the blockchain industry for four years. He joined Gnosis in early 2019 to take on the role of Product Manager for the Gnosis Safe Project.