Venture Capital vs. Cryptocurrency, Blockchain, DAO and Web 3.0
We have seen strong adoption of crypto-based systems this year, DAO and Web 3.0, including decentralized financial applications (DeFi), unusable tokens (NFTs) such as digital art, cryptocentric gaming, and the increasing adoption of cryptocurrency as an investment and payment instrument. One of the most recent developments is the emergence of decentralized autonomous organizations.
DAOs have been around since 2016, when The DAO, a new form of investment that attracts a significant portion of Ethereum (ETH) tokens, raised over $ 150 million at the time. Many consider to be the ultimate form of human coordination. However, due to a recent exploit, hackers stole $ 50 million of the organization’s funds.
Despite initial setbacks, have seen a second birth in the past few months. This is primarily made possible by more sophisticated frameworks and tools, as well as by minimizing friction in setting up the DAO and interacting with the DAO. Some early experiments like DXdao, DAOStacks Genesis DAO or MolochDAO have 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 the ecosystem, buy NFTs together, or contribute to social activities or movements.
Additionally, the DAO is likely to be the biggest transformational change in the way venture capital funds (VC) work. Venture capital funds need to change the way they invest in projects, how they get involved, and how they create value. At the same time, however, one’s own business models can be disrupted by DAOs, which themselves become investment vehicles. Web 3.0 will also fundamentally change access to investment opportunities and enable democratic investment opportunities without accredited investors or without restrictions on net assets.
How VCs Invest in Web 3.0
It is no longer uncommon 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 a blockchain-based ecosystem. However, the investment approach is different from traditional venture capital.
Most notable is the widespread adoption of a public sale (such as an initial coin offering, an initial decentralized exchange offering, and an initial exchange offering). These democratize access to investment transactions and enable more investors to enter the investment round with reduced entry barriers and coordination costs. Many Web 3.0 projects are also primarily led by a community-led, with investment decisions being reviewed through a community vote – perhaps the most prominent example is fundraising for campaigns.
So while investment transactions have traditionally been carried out behind closed doors with little or no stakeholder participation, VC funds in Web 3.0 are subject to public participation, much more so in order to get a seat at the table. Even so, Web 3.0 projects sometimes get involved in a smaller private crowdfunding before the public token sale. This typically involves a SAFT agreement (or SAFE agreement plus token options) with the party planning to issue new tokens. However, this often includes the obligation to a longer test or embargo period.
But in the NFT sector in particular, it remains to be seen how VC funds can gain an advantage over private investors, as NFT collectibles are often immediately sold to the public, which means that there is no possibility of participating in private advance sales.
Related: Airdrop, DAO, Token Release and Public Domain are the next frontier for NFT
How VCs can add value to Web 3.0 projects
There is a wide range of services and support VCs provide to startups – not just capital. VC funds regularly support the companies in their portfolio with recruiting, marketing, consulting, legal or other services. After all, the success of these startups is important to them and they want to do everything possible to support them.
However, Web 3.0 will fundamentally change the meaning of “smart money” for projects. DAOs often do not have a central organization that can provide these additional services. Instead, VC funds that support projects usually do so primarily through community engagement. This includes advocacy of the community or direct participation in community processes. But it is also about lobbying and other forms of communication with stakeholders outside the direct ecosystem or even Web 3.0, as these discussions are often a challenge for the stakeholders.
A prominent example of a venture capital fund that relies on this new form of value proposition is Andreessen Horowitz (a16z). With 2.2 billion US dollars in the Crypto Fund III, a16z is not afraid to actively participate in the management of its portfolio projects such as Uniswap.
Venture capital has been around since the 1940s and is primarily 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 venture 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 crypto economy.
In partnership with leading protocols, BitDAO is building a financial future that hopes to support DeFi, DAOs, games, and NFTs. PleasrDAO, an art acquisition and investment platform, collects digital art that represents and funds key ideas and movements that are consolidated in the chain in the form of NFTs. PleasrDAO is experimenting with digital property and art ownership, helping to change the way people can invest in art.
Related: DAO will be the future of the online community in 5 years
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 beyond the rigid structure of the current VC landscape.
Venture capital in an identity crisis
Traditional venture funds need to monitor these developments and get a clearer picture of their own value proposition for Web 3.0 projects. Most importantly, venture capitalists need to demonstrate how their value differs from community-based investment DAOs. It is possible that, over time, some traditional VC funds will decide to adopt a structure in order 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 is to remain relevant in the new Web 3.0 age.
Lukas Schör is Product Manager at Gnosis Safe – a multi-signature wallet and platform for digital asset management on Ethereum. Lukas has worked in product-related roles in the blockchain industry for the past four years. He joined Gnosis in early 2019 to take on the role of Product Manager for the Gnosis Safe Project.