The evolutionary blueprint of venture capital: DAO venture capital fund is the general trend?

The Austrian economist Joseph Schumpeter coined the term “creative destruction” in 1942. The core idea is that over time, capitalism tends to push the system to focus on efficiency. The old and outdated ways of working have been replaced one by one. The current Web3 and its continuous development mean that this replacement process will be much faster than the traditional enterprise that takes several centuries to complete the replacement of the old and the new. I think the past few years are a good example of the creative destruction experienced by the venture capital (VC) industry. In view of the embryonic nature of Web3 and blockchain technology, the financial support available to the founders of various projects and individuals who deploy the technology has undergone tremendous changes in less than ten years. I will explain in detail how to divide into three stages below.

The evolutionary blueprint of venture capital: DAO venture capital fund is the general trend?

  • 2012-2015-At that time, venture capital investment in digital assets was almost entirely completed by traditional venture capitalists. For VCs, these are high-risk investments made on the edge of technology trends. Blockchain investment is not for “here and now”, but for the distant future.
  • 2015-2017-ICO is in a peripheral position and is far from a “recognized” method of fundraising. Networks like Ethereum and Cosmos have emerged in the past few years, which eventually led to the ICO boom. Some VCs focus on investing in digital assets (tokens), but their investment scale and industry status are considered incomparable with traditional VCs.
  • 2017-2021-ICO started to explode around March 2017, ICO raised 8 to 25 billion U.S. dollars (statistics vary from different sources). After that, the market experienced a bear market, and every fund was preparing for the worst, at least until May of last year. The ICO boom has laid the perfect foreplay for the newly discovered financing primitives to take off. This era gave birth to the first generation of important token investment funds. Many angel investors have also been born, who withdrew after making a profit after the investment agreement projects were listed.

Among the multiple agreements launched around 2017-2018, the tokens or assets allocated to the founding team members through the Vesting mechanism have now been gradually withdrawn. This mechanism empowers a new generation of capital allocators, who are experienced in guiding and helping other founders to navigate the rapids of the industry, and they are also financially strong. VCs in the digital asset field must also compete with hedge funds, which are now also aggressively investing heavily in the encryption field. In other words, everything we have learned about venture capital in the field of digital assets has changed drastically in just four years. Part of the reason for the change is the venture capital DAO. Venture capital DAOs can be regarded as the new DeFi primitives that have emerged in the past three years. They can help allocate resources to emerging companies in the digital asset field. Remember the DAO that was hacked in 2016? Its goal is to provide enterprises with resources while obtaining tokens in exchange. DAO is an early prototype of the ICO era. A few years later, venture capital DAO projects like Metacartel began to actively participate in venture capital together with traditional funds.

Understanding the venture capital DAO

In traditional VCs, the main source of funds is usually large pools of funds, such as pension funds, endowment funds, and strategic corporate investors. Some individuals or family offices with large amounts of funds that need to transfer exports also tend to invest in VCs, believing that this is an excellent way to get in touch with emerging startup companies in the early stages. There is an intermediate layer in the form of “funds in funds”, but we will not discuss this issue in this article. Historically, this will bring about “contact” issues. The huge pool of funds usually has no access to the best fund managers who are emerging. On the other hand, it may be difficult for the best fund managers to find good sources of funds. When operating a fund, who you raise funds from is usually as important as what you invest in. This is part of the reason why many fund managers who initially gave seed investment by Julian Robertson of Tiger Global Fund can do so much. When considering the capital market, the concept of “personal connections” can become a powerful stimulant.

The evolutionary blueprint of venture capital: DAO venture capital fund is the general trend?

Source: “Harvard Business Review”

The venture capital DAO destroyed this relationship. In theory, it allows any cooperative in the world to come together and join forces to start a VC. The assets it invests in are digital and traceable assets on the chain, and its investment performance is verifiable. Compared with the traditional opaque VC, this should be a better VC management mode. Why? For entrepreneurs, this approach makes venture capital more global. This is important for venture capital to play a role in specific geographic or niche themed cases. Anyone should be able to establish a DAO-based entity, attract the decision makers behind it and obtain financial support. Early VC VC variants have emerged in the form of enterprises like YGG. Instead of procuring capital from outside, they procure assets and connect them to the labor market. Importantly, the current venture capital DAO brings several key differentiating factors in the field of venture capital.

  1. Venture capital DAOs usually have more diverse members, usually more experienced than traditional VC team members. DAO members are usually VC traders who can bring meaningful value to the enterprise.
  2. In theory, the decision-making process of the venture capital DAO should be transparent. A pre-selected committee, or open-ended DAO voting, will make a decision on whether an investment should be made. Capital allocation is carried out through digital currencies that can be transferred instantly.
  3. Venture capital DAOs generally tend to invest in digital assets. It can more easily distribute the invested assets to members. The decision to release investment holdings can be made at the DAO level or at the individual level. The agreement to raise funds from the DAO can track when and whether the DAO opts out. Similarly, those who provide funds to the DAO are more likely to see specific changes in the DAO’s portfolio immediately.

In my understanding, the world of venture capital is being divided into two paths. On the one hand, there are industry experts who set up their own independent and single. Elad Gil’s $300 million fund may be the best representative of this trend. On the other hand, the fund will be dedicated as an independent department, shouldering part of the responsibility for the development and growth of the enterprise. A16z is almost a perfect example. The founders who work with the fund have access to some of the best talents in marketing, compliance, growth and finance as part of the added value they bring to the company. DAO is at the intersection of the two. DAO can allow collaboration and independence at the same time. Therefore, it can greatly improve the transaction process of early angel investors and others, and have a network of people they trust enough to help the invested company achieve large-scale growth. None of this will be bound by the competition clauses that centralized funds usually mandate. There are currently several DAO venture capital funds. We can look at some of these examples below.

Metacartel-Eco-first approach

The members of the DAO include the CEOs of Aave, Nexus Mutual, Ocean Protocol and Axie Infinity . The organization incubated Raible, Gelato Network and DAOHaus. This is Metacartel. DAO was established in the post-2017 bear market with the aim of establishing an ecosystem composed of founders and builders. The threshold cost for individuals to enter the DAO is about 10 ETH , and for institutions it is 50 ETH. This brings capital to the DAO, while planning and managing who can enter the transaction flow. Money alone is inaccessible. Individuals should promote themselves to the DAO and get enough support to become a member. The DAO itself is happy to be the first investor in an early-stage startup project. Joining the DAO is a process that requires permission and requires members to reach a consensus, but exiting does not require permission. Individuals who withdraw from Metacartel get a proportional share of the assets held by DAO. Becoming a venture capital fund is just one of many things Metacartel does. The ecosystem also issues development subsidies and seeks strategic cooperation with corporate institutions that lay the foundation for web3 and community organizations.

The evolutionary blueprint of venture capital: DAO venture capital fund is the general trend?

Metacartel ecosystem map released in the first quarter of 2020

The LAO-starting from a legal perspective

The LAO has made a legal transformation on how to promote DAO venture capital. So far, they have invested US$50 million in approximately 30 companies. The LAO was established in April 2020. The main body is a company registered in the State of Delaware in the United States, intended to be integrated with traditional venture capital entities. The membership limit of LAO is approximately 99 qualified investors. DAO shortlisted members should provide their AML-KYC documents. The size of the investment varies from US$50,000 to US$100,000, and the voting period lasts for 7 days. There is no designated “general partner”. Everyone who is part of the DAO has the right to vote. The invested companies supported by The LAO will benefit from the current huge network of mentors in The LAO.

Impossible Finance-Decentralized Launchpad

Remember Binance Launchpad? It used to be a way to launch a new token network on Binance. Whenever a new network is launched, the founders are distressed by two things: token distribution and legality. If you don’t have a strong influence on social media, the cost of finding early adopters for a new network can be high. In addition, market participants find it difficult to find a legitimate platform to participate in early investment in the early stage. Binance has solved these two problems by conducting due diligence on venture companies and launching projects by selling digital assets on exchanges. Impossible Finance brings the same experience to the DAO model. The founders who cooperated with DAO received incubation funds, and the venture capital fund helped to expand the scale. If DAO members are satisfied with the development of the project, they will distribute tokens on launchpad. How do you choose who to allocate tokens to? Impossible Finance has a native token for staking and governance. Those who pledge assets will allocate tokens for new projects to avoid competition or high gas fees. You can click here to learn how the system works.

Syndicate DAO-Infrastructure for investment collaboration

Over time, the popularization of finance has adopted different forms and approaches. One way is the emergence of angel investment and syndicates. Platforms such as and Republic allow individuals to invest in startups anywhere in the world. SyndicateDAO is building an infrastructure that allows ordinary people to jointly invest in the web3 native ecosystem. This platform product allows individual groups to come together to raise funds for investment, donation or active management. The team has jointly raised US$20 million to achieve this goal. I applied for its private beta, but it was not accessible at the time of writing, but once the product is released, I will likely become an active user of the product. The core bet of SyndicateDAO is likely to be that capital management is now becoming a multiplayer game, and the infrastructure currently in use is not optimized for it. From buying NFTs (for example: PleasrDAO, PartyDAO) to game acceleration (for example: YGG), collective action is taking shape. I strongly recommend clicking here to read A16z’s post about their investment in SyndicateDAO.

The above is not a comprehensive overview of all DAOs in today’s ecosystem. There are many outstanding projects I haven’t mentioned. I strongly recommend reading Messari’s article on venture capital DAO, you will have a more comprehensive understanding of related projects in this field. My personal understanding is that we have seen the emergence of a new DeFi primitive, and this primitive has been largely ignored by the market. Unlike the lending market or AMM, the currency circulation of DAO venture capital funds is slower because capital allocation takes longer than asset conversion. Over time, some of these DAOs are likely to become multi-billion dollar entities in the future. A16z in 2040 may be completely managed by anonymous experts on the chain, and their work performance and reputation can be tracked on the chain.

DAO’s success story?

Historically, venture capital institutions have always relied on closed interpersonal and institutional networks. In my opinion, the risk-related DAO will completely unbind this. Instead of waiting for an assistant or analyst to introduce the company, the company will post its requirements on a public forum. Individual members of the DAO can bid or provide help in a competitive manner. It builds a transparent reputation for angel investors, while giving founders more options. The venture capital DAO may also cooperate with other associations and DeFi agreements to obtain the best results. One possible way is to bring freelancers together to form a DAO that provides specific services. We may see a group of lawyers build a DAO to provide legal services for the agreement, or writers unite to help the DAO optimize the public relations communication of the companies it invests in. These will be DAO-to-DAO interactions, not company-to-company interactions. Why is this important? Because technically speaking, DAO can be opened to a lot more people than the talents recruited by the company with payroll. This allows both supply and demand parties to seek what is best for them, instead of letting themselves be constrained by the willful options provided by centralized venture capital institutions.

The evolutionary blueprint of venture capital: DAO venture capital fund is the general trend?

What is more exciting for me is that a DeFi native venture capital DAO can choose to use DeFi projects to raise funds for itself. It is not impossible to use token assets to borrow on the chain to double the investment in wind bidding. In a similar situation, the venture capital DAO can allocate its assets into an index, tokenize the cash flow of the companies it invests in, or simply use it for farming income. Crypto-native venture capital funds have already pledged assets to increase returns. In the DAO mode, this can develop like a doping. More importantly, the venture capital DAO can adjust incentives better than centralized institutions. The well-known blockchain investor Darren Lau recently wrote an article about crypto venture capital knowledge that is actually concentrated in about 100 analysts around the world. The salary structure and incentive model that incentivize scout deals and early rounds are often unfair, especially for analysts in the early stages of their careers. In the DAO model, carry and fees can be embedded at the smart contract level-for those who put in the work, it is almost equivalent to what you see is what you get, and there is no vague misleading. One way that has already happened is for the token project to provide tokens to industry experts in exchange for early-stage guidance.

The evolutionary blueprint of venture capital: DAO venture capital fund is the general trend?

Source: Link

There is a more critical macroeconomic issue here. Venture capital activities have always been concentrated around Silicon Valley. Now it has become a global game. It is for this reason that large funds such as A16z, Sequoia and Accel have regional funds. Centralized venture capital funds rely too much on centralized banking infrastructure and traditional institutions, while DAO venture capital funds can attract, compensate and retain talents in a way that the former cannot, and invest more effectively on a global scale. In the crypto-native circle, the use of stablecoins to invest in new projects has become commonplace. Soon this will be extended to non-encrypted native circles, where the venture capital DAO will really shine. Although venture capital as an asset class has achieved rapid expansion in the past few decades, there is no reason to believe that it can meet all the capital requirements of the market. As an industry, this field operates on consensus. The DAO can subvert the above-mentioned model of venture capital by routing funds to undervalued individuals and topics. When you can have 1,000 true investors, why limit your income channel to 1,000 true fans? In my opinion, the capital market is undergoing the same evolution as the creative industry. In the early days, writers needed a high degree of credibility and went through a planning process of publishing works selected by well-known publishers. Platforms such as Instagram and Facebook have democratized this process. In view of decentralized exchanges and permissionless lending markets, capital markets have also undergone the same evolutionary process. We will observe the effect of this evolution in capital allocation at an appropriate time.

I know very well that the future will be completely different from the past. Venture capital funds will have to adapt to new things. One way to achieve this goal is to invest directly in the DAO through a venture capital fund. Today, the members of the venture capital company will develop into a node of an ever-growing network. In contrast, the current fund model is inherently hierarchical. People in venture capital funds should not be the gatekeepers of capital, but should strive to transplant existing networks and expertise into the DAO economy. Venture capital institutions such as Not 3Lau Capital and EGirl Capital specialize in this area. They are mainly crypto-native analysts who make their own investments under the halo of reputation earned by cooperating with multiple DAO organizations. This transition from a centralized venture capital institution to a networked venture capital institution will be the most important transformation that venture capital funds will experience in the next decade. I bet that by 2030, we will have at least $10 billion in venture capital funds running entirely on the chain. Some of these traders dealt with it through pseudonyms. It will be very interesting to see that encrypted local capital spills over into other underinvested emerging technology topics in the next ten years.


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