Will Crypto Investment-Focused DAOs Replace VC Firms?

Autonomous organizations known as DAOs have formed to try and buy the US Constitution and a golf course. They are also planning on investing in cryptocurrency startups, which could disrupt the traditional funding model.

These organizations are different from venture capital firms in that they are focused on investing in cryptocurrencies. Instead of relying on their industry-specific knowledge, they can now source deals and meet the founders of companies.

Joyce Yang, the founder of Global Coin Research, said that her organization aims to democratize crypto investing by providing access to those who would never have had it otherwise. Over the past year, the number of members of DAOs has increased significantly. According to data provider DeepDAO, the organization had over 1.6 million members in December.

Due to the dominance of venture capital firms such as Andreessen Horowitz and Paradigm in the funding of tech companies, such as startups in cryptocurrencies, the concept of a DAO has been regarded as a relatively untested one.

Access to Founders and Deals

These organizations are composed of individuals who are passionate about investing in cryptocurrencies. They can also direct portions of their funds into early-stage startups. Members of an investment-focused organization can buy-in through a governance token, which is a type of digital asset that can be used for transactions. 

These individuals can also access private spaces where they can meet the founders of companies. For instance, members of Global Coin Research, which has over $25 million in assets under management, have invested in over 30 deals, which include projects such as Aurora and Coinvise.

According to GCR, its members have seen average returns of over 40-fold on their investments. Michael Steinberg, the founder of Reciprocal Ventures, noted that the rise of cryptocurrencies has allowed micro VCs to thrive. He referred to them as fundamental shifts in the way early-stage startups are funded.

One of the most prominent syndicates is AngelList, which allows investors to participate in deals with leading venture capital firms such as Y Combinator and Tiger Global. While syndicates allow investors to participate in deals, they typically do not have access to the founders of the companies they are investing in. With a DAO, investors can still meet the founders of the companies they are investing in.

Support From the Community

The founders of crypto startups can also benefit from having a relationship with the community, which can help them develop their products and address their concerns. For Jenil Thakker, the founder of the decentralized payment platform Coinvise, the support he received from investment-focused organizations helped him start his community. 

He noted that they gave him access to a wider network of people. For instance, GCR helped develop the platform for Coinvise. It also launched its governance token. According to GCR’s Yang, the need for a community has become a requirement for early-stage companies as they look to raise funds. They need to have a network of people who can help them develop their products.

According to him, most investment-focused organizations offer various services to their members, such as media, legal and HR support. These services can be costly and often not feasible for a traditional venture firm.

Hybrid Future

Due to the rapid rise of cryptocurrencies, investors have been chasing the industry’s impressive returns. Several prominent investment organizations have emerged, such as Komorebi Collective and FlamingoDAO.

The trend has raised the question of whether cryptocurrencies will eventually replace the traditional venture capital industry. Steinberg said that although it’s possible, VC firms are still very active and have plenty of time to devote to startups.

Christian Kaczmarczyk of Third Prime Capital sees the power of cryptocurrencies as an asset class that will continue to grow. Other venture capitalists also noted that despite the advantages of having a community and the capacity to raise funds, the operation of a DAO is still lagging behind traditional VCs.

As the popularity of decentralized asset platforms (DAOs) grows, a hybrid model is emerging that combines the community-driven ethos of the organizations with the operational expertise of VCs. There’s also room for more centralized investors, such as FTX and Coinbase, which are considered as liquid venues for crypto transactions.

While cryptocurrencies have great potential, they also carry risks, such as the possibility of miscalculations or frauds. Having a strong track record is important to stand out from the crowd.

In a crypto bull market, it’s the founders who have the power when it comes to choosing the right investors. According to Kaczmarczyk, entrepreneurs should align themselves with their vision and choose the ones who can help them achieve it.