Hey DAOs, Are Venture Capitalists Your Friends?

  • In the first half of 2022, more than $ 30.3 billion was raised in 1199 fundraising rounds for Blockchain projects
  • “If you truly believe in the protocol, you are expressing that belief through the market by buying,” Franklin Bi, director of portfolio development at Pantera, told Blockworks.

As early-stage Web3 startups continue to attract the attention of venture capital, the relationship between decentralized autonomous organizations (DAOs) and venture capitalists (VCs) becomes more intertwined.

According to Messari’s “First Half 2022 Fundraising Report”, $ 30.3 billion was raised in 1199 fundraising rounds in the first half of 2022, exceeding the amount of funding received by all blockchain startups. last year.

This shows that, despite bear market conditions, there is still considerable interest in Web3 projects. Early stage startups that included participation in DAO, which received 71% of all funding, were particularly sought after.

A DAO operates through codified rules, ensures that governance in the organization remains transparent and that decision making is shared among all members of the community.

The nature of the way DAOs operate relative to traditional startups has inevitably changed the way venture capitalists fund Web3 projects early on, Hart Lambur, co-founder of the UMA protocol, told Blockworks.

“In the history of the modern enterprise, the huge amount of venture capital raised has all used the same negotiation structures, but what we’re seeing is that DAOs can actually raise money in a completely different way,” Lambur said.

“DAOs are a way to rewrite those rules in a different way, in a way we haven’t created yet,” he said.

DAOs are primarily member-led organizations. Most DAOs in existence today have one of two membership models: token-based membership and share-based membership.

In token-based membership, the most common form, participants vote on key decisions with a voting weight directly proportional to ownership of the token. To be truly self-contained, those votes must directly execute code on the blockchain, rather than simply signaling members’ intention on an issue that developers actually implement (or not).

Share-based membership is similar, but participants who want to become members must first submit a proposal and be approved before joining the DAO, when shares represent voting power and ownership.

Where does venture capital fit in?

Franklin Bi, director of portfolio development at Pantera, a hedge fund focused on blockchain-related projects, told Blockworks that token-based membership often gives investors an equal footing in building a position in the market.

“If you truly believe in protocol, you are expressing that belief through the market by buying, then you are voting with the same belief: it is an equal opportunity playing field,” Bi said.

The problem, he said, is often early stage funding in a closed ecosystem or DAO with share-based subscriptions.

“Retail investors cannot participate at that level [early stage]so it seems unfair, “Bi said.” The way I like to think about it is that the compromise for raising capital through this method is also bringing what hopefully is a high-quality participant in that ecosystem. “

This sentiment is shared by Andrew Jones, head of growth and marketing at startup Web3 Index Coop, a collective aiming to create and maintain the best crypto indices on the market, who said that VCs definitely have a place in the Web3 ecosystem.

“There is a kind of love-hate relationship with communities and VCs, but I don’t really believe it,” Jones said.

“We wouldn’t be here – we wouldn’t be functional – if it weren’t for the fact that the VCs bought a token,” he said.

“Governance is a process where it starts with the founders, over time you build trust and a relationship, then you get a delegation and work for decentralization and greater autonomy, it doesn’t happen overnight – it’s a specter,” he added. Jones.

Reliance on venture capitalists may be justified for early stage Web3 startups. For later-stage DeFi protocols (often with millions of dollars locked in its protocol), larger traders often backed by venture capitalists and hedge funds – nicknamed whales – can have immense influence.

Marco Moshi, DAO lead at Polygon, said in an interview with Blockworks in June, that the biggest challenge with token-based DAO governance is that a community shouldn’t be owned by the wealthiest or those who have arrived. Before the others.

“[The] the stakeholders of the organization are likely to change over time and DAOs should take into account that their organization is evolving and the people involved will also change regularly, ”Moshi said.

More recently, MakerDAO, one of Ethereum’s largest DeFi protocols, voted against adding an advisory board to implement a leaner leadership structure within the DAO. This proposal has been strongly contested and seen by some as a clash of interests between venture capital and independent participants.

While this is sometimes the case, Bi believes these disagreements within protocols are actually quite normal.

“It’s a deja vu feeling because when you walk into a startup, that’s what happens almost every day. People are super passionate and fight with each other. The difference is that startups usually have a CEO who tells everyone to go in a certain direction, “Bi said.” It’s just the nature of people who like to take risks and do passionate things.

For Bi, as an investor, after all, the most important factor is that the protocol can be valued and developed in a self-sufficient way.

“Good VCs recognize that the value of the protocol is to have the community on its side. If a VC pushes everyone else out of the community, then they get screwed, “Bi said.” So there is still good alignment with VCs and communities in general. “


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  • Bessie Liu

    Blockworks

    Reporter

    Bessie is a New York-based crypto reporter who previously worked as a tech reporter for The Org. She completed her masters in journalism from New York University after working as a management consultant for over two years. Bessie is originally from Melbourne, Australia. You can contact Bessie a [email protected]

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