Now they are organizing to deploy capital into cryptocurrency startup companies, potentially disrupting the venture capital funding model that has financed waves of new technologies for generations.
Crypto investment-focused DAOs have become the new arena for sourcing deals, meeting company founders and cutting checks – all functions that were typically done by well-heeled venture capitalists who prided themselves on their industry-insider status.
DAOs are blockchain-based organizations that are decentralized and unregulated in the traditional sense, often governed by a native crypto token.
In the past year, DAOs have sprung up with weed-like vigor, surpassing 1.6 million in membership in December, up 130-fold from just 13,000 members last January, according to DAO data provider DeepDAO.
But for funding new tech companies, DAOs are a hitherto untested model, partly because venture capital firms like Andreessen Horowitz and Paradigm have so thoroughly dominated the business of funding entrepreneurs in crypto and other fast-emerging technologies.
Access to deals and founders
Enter “investment DAOs,” which are collectives of crypto-enthused individuals capable of investing their personal capital or directing portions of the DAO’s treasury into early-stage crypto startups.
Typically, membership in an investment-focused DAO involves an upfront buy-in in the form of the DAO’s governance token in exchange for access to private spaces – invite-only Discord chats, Telegram groups or in-person events – where deals can be sourced and checks written.
Take, for example, members of Global Coin Research (GCR), who have cumulatively invested in more than 30 deals, deploying over $25 million into projects such as blockchain interoperability protocol Aurora and Web 3 management platform Coinvise. (In order to participate in a deal, the individual DAO member must be an accredited investor, typically defined as individuals who are legally authorized to purchase securities that aren’t registered with regulatory authorities.)
As of December, GCR estimates its investments have seen average returns over 40-fold for projects that become liquid or marked to market.
“Crypto has allowed micro VCs to really thrive, because the return on investment on blockchain projects can be in the thousands of percent,” said Michael Steinberg, founder of venture capital firm Reciprocal Ventures. Steinberg dubbed investment DAOs as “fundamental recasts” of angel networks or syndicates – loosely organized networks of investors whom early-stage startups have traditionally turned to for funding.
Perhaps the most well-known syndicate is AngelList, which allows accredited investors to participate in deals alongside top venture capital firms such as Tiger Global or Y Combinator.
“The problem with the syndicates is, as a passive investor, you have no access to the founder” of the startup, Steinberg said. “With DAOs, there’s no gating intermediary to block your access.”
Founders also can benefit from their interaction with the DAO, which includes receiving product feedback and advice from a crypto-native community. For fledgling crypto startups, user adoption and product-market fit are all too familiar challenges they – and their non-crypto counterparts – still face.
Raising funds from investment DAOs “helped us in bootstrapping our own community by on-boarding new members through co-hosting events with GCR,” said Jenil Thakker, founder of Coinvise, who has worked with both GCR and The LAO, another investment DAO. “More broadly, investment DAOs offer access to a much wider network of people that can help projects get early feedback.”
For Coinvise, a DAO infrastructure company, GCR helped the startup with product testing, including using the Coinvise platform to launch its GCR governance token.
“It’s becoming a thing now that founders need a community when they fundraise,” GCR’s Yang told CoinDesk. “A project wants to find a good crypto native team and get their products used. They also want a community to provide feedback.”
According to Thakker, most investment DAOs even offer media, hiring and legal services to support their portfolio companies.
“Offering all these at a traditional venture firm costs money and often is not scalable,” Thakker said.
A hybrid future
As cryptocurrencies have grown to nearly $3 trillion in market capitalization, investor capital has rabidly chased the booming industry’s eye-popping returns, leading to the formation of several prominent investment DAOs with varying flavors. These include Komorebi Collective, which invests in female founders, and FlamingoDAO, which focuses on non-fungible tokens.
The trend raises the question of whether DAOs will encroach on, or one day, replace traditional venture capital.
“It’s possible,” says Reciprocal’s Steinberg. However, “crypto venture capital is a full-time job. VC firms are generally very active, highly engaged, and have lots of time and resources to devote to portfolio companies. We’re all for partnering with DAOs, but some founders need playbooks.”
“I definitely view their power increasing over time,” Third Prime Capital’s Christian Kaczmarczyk told CoinDesk. “The venture firms who work with DAOs will be successful in the long term.”
Other venture capitalists say the DAO venture model is still lagging traditional VCs in terms of operational capabilities and efficiency.
“As far as I’ve seen, projects value DAOs for the strength of their individual members and capacity for useful partnerships, but still overwhelmingly prefer traditional funds to lead rounds,” said Kyle Wang of Valhalla Capital, who says he is also active in some investment DAOs.
But as DAOs gain increasing market share on startup cap tables, a hybrid model appears to be taking shape, combining the community-driven ethos of DAOs with the deep pockets and operational expertise of venture capitalists.
“There’s room for more centralized investors alongside the extremely democratized investment syndicates, similar to how FTX and Coinbase are viewed alongside Uniswap as liquidity venues,” said Evan Feng, head of research at crypto venture firm CoinFund. “There’s room for hybrid approaches as the boundaries between the two camps blur further.”
Investment DAOs also carry with them risks associated with cryptocurrencies, such as regulatory scrutiny, mismanaged DAO treasuries or flaws in little-tested technologies. An individual DAO’s investment track record is also important, helping more established DAOs stand out from the pack.
But in a crypto bull market, it’s the startup founders who ultimately have the power when it comes to the types of investors they work with.
“Entrepreneurs should choose investors which most align with their vision and give them the greatest chance for success,” says Third Prime’s Kaczmarczyk. “If that is a DAO, then so be it.”