Venture capital funded more than half of all US public companies in 1979. Thus, representing a third of all stock market’s value. All the top 5 most valuable companies in the US (Apple, Microsoft, Google, Amazon & Facebook) began as VC-backed startups.
Venture funds specialize in funding start-ups that have yet to turn a profit but have high growth potential. Sometimes even returning more than 100x of the initial investment. VCs fund start-ups out of equity rather than debt because startups are cash poor but can have enormous upside potential.
The traditional VC space has obvious pros like big check sizes, resourcefulness, and doubling down investments and networks. But there are some painful pain points, such as slow decision-making, high bureaucracy, high valuation sensitivity, and high demand for control, to name a few.
Decentralized Autonomous Organizations ( DAOs ) are a good vehicle for addressing some of the gaps in the traditional VC landscape. A decentralized version of a company, DAO is driven by community governance and decision-making, directly targeting some of the conventional VC pain points. Thereby enabling faster decision-making, lesser control for start-ups, and adhocracy. Additionally, DAOs provide increased investor flexibility, increased diversity of funded ideas, de-centralized control, and improved access to public capital.
That said, does the future of VCs looks safe with the reincarnation of DAOs and their implications?
Therefore, this article explores the overarching question: “Will DAOs potentially replace VCs, or do DAOs pose a threat to VCs?”
The traditional way: VCs
Among the three ways to invest in private capital – are buyouts, growth funds, and venture capital.
Venture capital is a form of private equity that finances start-up companies that are expected to have an exponential return and high-growth potential. In technical explanations, venture capital firms create a fund of blind pool investments, not knowing what companies they would invest in. But making an investment mandate on what types of start-ups they would invest in.
Here’s a basic flowchart to showcase how Venture Capital works, reiterating Medium’s 2018 blog.
Source : Medium
The annual return for a VC fund ranges from 15-27% and has a high premium compared to S&P 500’s 9.90% return in the last ten years. With the increasing growth, especially in Asia, there has been an increase in the number of deals and funding poured into start-ups worldwide.
In 2021 reached $612 billion in venture capital activity, which was a 108% increase from the year before. In 10 years, the growth of dollar volume invested in ventures around the globe is 92% YoY.
Source : Crunchbase news
In 2021, there was also a 24% increase in the number of VC deals around the globe, with numbers as big as 11,601 deals. Despite the apparent rise, there are specific pain points . Such as the founder’s reduced stake, the delay in decisions and funding timelines, and much more.
DAO VCs: The concept
DAO VC is building on the concept of community decision-making and governance, in contrast with traditional VC central authority decision-making. It will be an autonomous venture ecosystem for both end users and start-ups.
DAO VCs present themselves as an exciting platform allowing retail investors to transition into the crypto space. While allowing start-ups to have a diverse pool of investors. By investing as low as $1, users can participate in the market like more prominent traditional investors. Simply by creating a shared collection of contributors acting as token holders.
The rise of blockchain technology has changed the way investors could think about venture capital funds. VCs are increasingly diversifying their funds into the cryptocurrency space. Even are thinking about how to fundamentally change their fund structure so that it is centralized and allows for a more inclusive environment for many investors to play in the space.
Source : moneycontrol
Bridging the gap
The use of DAOs and adopting hybrid financing models to imitate “initial coin offerings (ICOs)” are two ways the VC is starting to innovate in space to bring more funding and participants into space.
A DAO can be described as a “community formed around a central idea that each member thinks is worth investing in. Money pooled within that DAO keeps track of each person’s contribution and gives proportionate governance rights”.
And though DAOs are a relatively new concept, their rapid growth suggests a future trend that can have significant implications for the Venture Capital landscape. Less than two years ago, when Ethereum was trading at $230, DAOs were few and far between. Most of them only held a few thousand dollars of AUM.
However, “after a year-long crypto bull market, millions of new people introduced to crypto, and thousands of projects launched and generating fees,” DAOs are now measuring in the millions.
The total assets under management (AUM) for DAO treasuries, listed on the DAO stats platform DeepDAO increased from around $380 million in Jan. to a peak of roughly $16 billion in mid-Sep. in 2021.
“2021: The (1st) year of DAO”
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