How do traditional VCs survive in the crypto world?

As a fast-moving world of decentralization, deregulation, and flexibility, Crypto is defying traditional VC’s passive LP model, 10-year lifecycle model, and strong legal framework built around investing. The Crypto founders were looking for a financing model tailored for early-stage Web3 startups: community-based financing by investing in DAOs and micro VCs.

While this shift may not be obvious at first, as large traditional funds such as a16z, Paradigm, etc. have made a lot of successful investments in Web3 recently, I think this will change soon.

What attracted many founders to VC firms on Sand Hill Road so far compared to Micro VCs and Invest DAOs is that those firms have a long track record of successful investing while Micro VCs and Invest DAOs do not. But the exponential growth in investing in DAOs and community VC investments over the next few years is sure to change that with more successful investments.

Another reason big VCs stay on the sidelines of the crypto market is that they offer not just capital, but brands that generate quality connections, which DAOs and micro VCs don’t . However, this is changing as large DAOs gradually become the now more recognized brands.

As the time advantage wears off, we will see more investment from these community VCs and DAOs. The advantages they have are obvious: the democratization and decentralization of funds. The success of cryptocurrencies depends heavily on how decentralized the project is, and having a few LPs holding the majority of the tokens would put the project at a disadvantage. In addition, the community votes democratically whether to invest in a project, rather than a single partner, which makes this method of community financing more suitable for cryptocurrencies.

Second, these investing DAOs and micro VCs provide each project with a large and engaged crypto-native community. A community not only provides users and feedback for a project, but can also be a vast network of legal, media, and technical support for a project.

Finally, these investing DAOs and micro VCs are often remote and non-legal entities . This allows for very flexible and quick investment decisions. The lack of bureaucratic paperwork, the need for multiple approvals and legal contracts is a big draw for crypto projects from these remote and non-legal entities.

Assuming the crypto industry manages to subvert regulation, these community funding models will continue to grow. If traditional VCs are to keep up, it must carve up different parts of the market where it can play to its strengths, rather than trying to compete with wild west-style DAOs and micro VCs. These markets may require stricter regulation, more capital and a longer-term perspective. In addition, traditional VCs should focus on equity projects rather than token projects, as this will help them solve the main problem of centralization, such as the one mentioned above, that having a large number of tokens in the hands of a VC may damage the project.

The CEX market is considered the perfect path for traditional VCs . Because of the entry and exit procedures, CEXs must be legal entities and require stricter regulatory approvals. In addition, a lot of capital is needed to list tokens and participate in fierce market competition. Lastly, investments in CEXs are typically through company equity rather than through tokens (eg, an investment in Coinbase Global, Inc., which operates Coinbase’s centralized trading platform). Other tokens that might benefit from tighter regulation by traditional VCs could be centralized cryptocurrencies like Ripple (XRP) and Hedera (HBAR), or the growing stablecoin market.

So I think that if the traditional VC model is to survive in the crypto world where community VCs and investing in DAOs have obvious advantages, it needs to be different and find a way that is more suitable for its own model.

Posted by:CoinYuppie,Reprinted with attribution to:
Coinyuppie is an open information publishing platform, all information provided is not related to the views and positions of coinyuppie, and does not constitute any investment and financial advice. Users are expected to carefully screen and prevent risks.

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