What do decentralized VC models mean for the future of early-stage investing?
Decentralized autonomous organizations (DAOs) are the new kids on the block. We have seen how DAOs can become a means for everyday regular people to be united around a joint mission to achieve seemingly impossible feats. Just last year, some people came together through the ConstitutionDAO in an attempt to buy an original print of the U.S. constitution.
While they lost the bid, the DAO broke a world record for the most money crowdfunded in less than 72 hours when it raised more than US$40 million from 17,437 donors. The best part — it had a median donation size of US$206.26 — small drops make the mighty ocean.
In 2021, VCs invested US$30 billion into crypto and blockchain startups. In this piece, we explore how decentralized VC models are extending the reach of disruption into the venture capital (VC) funding industry for Web3, crypto, and blockchain startups.
What are decentralized VCs?
Decentralized VCs represent a new form of venture funding that provides permissionless and transparent investing opportunities to retail investors. Decentralized VCs rely on blockchain technology and its applications in smart contracts, fungible tokens, NFTs, and DAOs to enable thousands of retail investors to pool funds to support early-stage projects in the Web3 ecosystem.
Types of decentralized VCs
Decentralized VCs can be grouped into four broad categories, namely;
- Launchpads: Launchpads support startups from ideation through project development and eventually IDOs (Initial DEX Offerings) where investors buy project tokens. AlgoDAO is a good example of a launchpad functioning as a VC that will increasingly become decentralized over time.
- Investment clubs: Investment clubs provide opportunities for retail investors to participate in early-stage investments through discounted or presale models that do not include the use of project tokens.
- Investment pools: Investment pools provide an opportunity for early-stage investment through ETF-like tokens that give exposure to the projects that the pool invests in.
- Investment DAOs: Investment DAOs also use a discounted price or presale mode, but it is different from investment clubs in that users invest in specific funds for a basket of projects rather than investing in individual projects.
Why do decentralized VC models matter?
In the past, early-stage investing was an exclusive preserve of accredited investors, family offices, high-net-worth individuals, and funds. The gatekeeping was well-intentioned; it was designed to protect retail investors from putting money that they cannot afford to lose in the early-stage investments; after all, about 90% of startups fail over a 10-year period.
However, the protections also rob retail participants of the upside potential that comes with success in early-stage investments. And perhaps philosophically; the gatekeeping infantilizes people and robs people of the agency to make their own financial decisions.
For investors
- Democratized access
Decentralized VCs provide democratized access to early-stage investments. Rather than keeping early-stage investments as an exclusive preserve of people with deep pockets, decentralized VC models also lowers the barrier to entry. Decentralized VC models give people the agency to make financial decisions and support projects they believe in.
- Improved representation
Decentralized VC models also improve representation in cap tables by ensuring that people from any part of the world get a chance to make early-stage investments without prejudice to their race, geographical location, or other class representations.
- Elevate investments beyond money
Traditional VC models focus exclusively on investors that can write checks. Decentralized VC models enable opportunities to benefit from early-stage investment through other intangible contributions. For instance, community members may earn token allocations in exchange for finding bugs, community building, or market education.
For developers
- Access to alternative sources of funding
Decentralized VC models provide startups, developers, founders, and entrepreneurs with access to alternative sources of funding. Many founders may never be able to raise funding from traditional VCs because they do not look like the typical founder; have access to the right networks, or even know how to pitch. Decentralized VC models eliminate the bias because it allows projects to be judged predominantly on their technical and business merits.
- A clearer path to product-market-fit
Decentralized VC models significantly expand the pool of people who review the project to make a decision on whether it should be funded or not. Unlike traditional VC models where only a handful of people view your idea, decentralized VC models might enable a community feedback loop. Also, the community response to funding your project can provide valuable signals that can help you fine-tune the idea to get product-market fit.
- Accelerated fund deployment with lower fees
When you eventually raise funding, traditional VC models and their use of fiat currencies mean that your project might need to clear additional hurdles before you can access the funds raised. You can generally expect to wait between 30 to 60 days after the term sheet is signed before you receive the money. With decentralized VC models, you can get near-instant funding and the best part is that you pay practically negligible transaction fees.
What do decentralized VC models mean for the future of early-stage investing?
We are still very much in the early stages of the emergence and development of decentralized VC models. However, we can rationally expect that decentralized VC models such as AlgoDAO will become a key driver of early-stage investing, especially in the Web3 ecosystem.
The fact that decentralized VC models such as AlgoDAO are powered by smart contracts already provides a smooth on-ramp for the broader Web3 industry. Hence, it makes sense that it will grow to attract a critical mass of blockchain and Web3 enthusiasts who are passionate about supporting builders in creating decentralized solutions.
At AlgoDAO, we are setting the pace for the democratization of early-stage investments in the AlgoDAO ecosystem. One of such models is our Reverse Hackathon Offering (RHO) which gives you a chance to invest in early-stage projects ahead of VCs and other traditional players.
Check out our post on how AlgoDAO’s RHO Work.
In the meantime, make sure to stay connected with us across our social media channels so you do not miss out on important updates regarding the RHO.
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- Medium: https://medium.com/@AlgoDAO.fi
