We have seen strong adoption of crypto-based systems this year, including decentralized finance applications (DeFi), non-fungible tokens (NFTs) such as digital art, crypto-centric games, and increased adoption of cryptocurrencies as investment and payment tools. One of the most recent developments is the emergence of decentralized autonomous organizations (DAO).
DAOs have been around since 2016, when the DAO organization, a new form of investment vehicle that attracted a sizable chunk of Ethereum (ETH) tokens, raised over $ 150 million at the time. Many saw DAO as the ultimate form of human coordination. However, due to a feat of reentry, hackers stole $ 50 million of the organization's funds.
Despite the initial setback, DAOs have had a second birth in recent months. This was primarily enabled through more mature frameworks and tools, as well as reduced friction in setting up a DAO and interacting with DAOs. Some early experiments like DXdao, DAOStack's Genesis DAO or MolochDAO showed the way for a new wave of decentralized organizations. Today, DAOs exist in different shapes and forms, ranging from large to small, used to manage ecosystems, collectively buying NFT, or contributing to social causes or movements.
Beyond that, DAOs will likely be the most transformative change in the way venture capital (VC) funds operate. Venture funds will have to change the way they invest in projects, how they relate to them, and how they add value. However, at the same time, your own business model could be disrupted by DAOs becoming investment vehicles. But Web 3.0 will also fundamentally change access to investment opportunities and offer democratic forms of investment without having to be an accredited investor or without net worth restrictions.
How Venture Capitalists 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 the establishment of specialized crypto funds to more traditional (institutional) funds that see the potential of blockchain-based ecosystems. However, the investment approach differs from traditional venture capital.
Most notable is the widespread adoption of public sales (such as initial coin offerings, initial decentralized exchange offerings, and initial exchange offerings). These are democratizing access to investment deals, allowing a greater number of investors to participate in an investment round with reduced entry barriers and coordination overhead. Many Web 3.0 projects are also primarily led by a community-run DAO, and investment decisions are vetted by a community vote, probably the most iconic example being SushiSwap's strategic fundraiser.
So while investment deals are traditionally often done behind closed doors with little or no stakeholder involvement, Web 3.0 venture capital funds have to participate much more publicly to get a seat on the market. desk. However, Web 3.0 projects sometimes engage in a smaller private fundraiser before a public token sale. This often involves a JUICE agreement (or SAFE agreement more token options) with the party planning to issue a new token. However, this often includes committing to longer periods of consolidation or blockage.
But, especially in the NFT space, it remains to be seen how venture capital funds can somehow gain an edge over retail investors, as NFT collections are generally sold publicly immediately, eliminating the opportunity to participate in private pre-sales.
Related: Airdrops, DAO, token issuance, and public domains are the next frontier for NFTs
How VC can add value to Web 3.0 projects
There is a wide range of services and support that VC provides to startups, beyond capital. Venture capital funds regularly support their portfolio companies with recruitment, marketing, mentoring, legal advice, or other services. After all, they have a vested interest in these startups being successful and they want to do everything they can to support them.
However, Web 3.0 will fundamentally change what "smart money" means for projects. DAOs often do not have a central entity to which these additional services can be provided. Instead, venture capital funds that support projects often do so primarily through community engagement. This includes advocacy for the community or direct participation in community governance processes. But it also involves lobbying and other ways of engaging with stakeholders outside of the immediate ecosystem or even Web 3.0, as such discussions are often challenging for organizations without legal personality.
A prominent example of a venture capital fund that is leaning toward this new form of value contribution is Andreessen Horowitz (a16z). With the $ 2.2 billion Crypto Fund III, a16z does not shy away from being actively involved in the governance of its portfolio projects, like Uniswap.
Investment DAO
Venture capital financing has been around since the 1940s and was used primarily by the wealthy. Since DAOs represent the next generation of venture capital funds, venture capital funds are not only investing and participating in DAOs, they are also becoming DAOs. Stacker Ventures is an example of a venture capital fund going DAO, trying to democratize early-stage investments in emerging assets. BitDAO, which is a protocol governed by BIT token holders, is one of the largest DAOs in the world focused on offering open finance and a decentralized and tokenized economy.
By partnering with leading protocols, BitDAO is building a future of finance that it hopes to support DeFi, DAO, gaming, and NFT. PleasrDAO, an art acquisition and investment platform, collects digital art that represents and funds important ideas and movements grounded in the chain like NFT. By experimenting with art and digital property, PleasrDAO is helping to change the way people can invest in art.
Related: DAOs will be the future of online communities in five years
VC is primarily a social investment tool to coordinate resources around a shared investment thesis. And Web 3.0 will enable innovative new ways that people can come together to pool capital and other resources that go beyond the rigid structures we see in today's VC landscape.
Venture capital in an identity crisis
Traditional venture capital funds should observe these developments and get a clearer picture of their own value proposition when it comes to Web 3.0 projects. More importantly, venture capital has to show how its added value differs from community-driven investment DAOs. Over time, some traditional venture capital funds may well decide to adopt a DAO structure to make their investment activities more accessible, transparent, and community-driven.
What is clear is that venture capital cannot just stick with its existing structures and processes if it wants to remain relevant in this new era of Web 3.0.
This article does not contain investment advice or recommendations. Every trade and investment move involves risk, and readers should do their own research when making a decision.
The views, thoughts and opinions expressed here are those of the author alone and do not necessarily reflect or represent the views and opinions of Cointelegraph.
Lukas schor is the product manager at Gnosis Safe, a multi-signature wallet and platform for managing digital assets on Ethereum. Lukas has been working 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.
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