Governance as a Value Add
Got Capital? Roll Up Your Sleeves
Since the dawn of crypto, Venture Capital firms have been cropping up like spruce trees in Norway. Almeada, Variant, a16z, Panterra, Paradigm — just to name a few.
Don’t forget the edgy ones, like Archetype (hey, Ash), GCC, CMT Digital.
While they differ in check-size and company stages, these firms are looking to achieve two main goals: grow the crypto overall ecosystem and produce returns for their LPs.
On the founder’s side, financing is a necessary evil. Available capital at the cost of a few basis points of dilution. With VCs injecting more growth capital into the Web3 ecosystem, founders and teams are afforded more discretion on how they raise.
Although, the current environment has made the decision more difficult.
Who do we work with? Are they more crypto-native? More technical? Capital or competence?
Dunno, haven’t raised — yet.
Working with DAOs, protocols, and L1’s who most all entirely have undergone this fundraising journey, venture firms are key stakeholders. They are hidden behind 40 hexadecimal characters which require on-chain sleuths to distinguish the size of their ownership.
ZachXBT you are a legend, my good sir.
While most of these investments are subject to a vesting period, VCs are left with a few options to increase the value of their investments and instill confidence in their founding team:
- Advisor
- Networking & Relationship Building
- Technical Implementation
- Governance
The last one is most interesting to me. Venture capital analysts and associates are now rolling up their sleeves and becoming akin to activist investors via Governance.
The Players
Let’s start out by listing who does this well: 1kx, Standard Crypto, a16z, Scalar Capital, Jump — to name a few.
Oh, and don’t forget Arca.
Though it often benefits the portfolio companies more than their own bags, these above firms are swallowing their pride and creating forum accounts, sitting on committees, and even at times running delegations. They are sprinting down the whole governance stack, replying to a proposal, auditing an idea, or posting their own.
If done well, Governance can increase the security and profitability of the protocol. It creates integration that stems across multiple DAOs. This is particularly true with technical implementations and human capital management.
Other times, it is dirty — as we’ve seen competing players come pump their own bags. When you are investing in organizations that service DAOs and the DAO itself — there is a clear conflict of interest.
Showing when accounts are created and how long someone has read — forums are a great way to snitch on the new guy. BrianBoy created 2 hours ago isn’t some coincidence…
Ok ok, it’s clear there’s a wrong way to do this, so how about the right way? Let’s take a look.
How to Increase Value via Governance
Decision-making in crypto is much more frequent than in equities and proxy votes. There is a positive EV to dictate the trajectory of a protocol or network. By partnering and participating in these efforts in the early stage of their growth, it cements investors’ relationship with DAOs long-term. They can dictate the value before and after exercising their options.
Venture firms are starting to realize this. If they have the bandwidth, they can slowly influence the future of a budding DAO.
A few ways in which they best do this:
Technical implementation
Best pioneered by Jump in the Terra days (RIP), venture firms can advise and reform token economics, emissions, and throughput. A notable example was Liquidity Parameters #3:
Here Jump outlined a way to boost on-chain liquidity without exposing any additional vulnerabilities and maintaining stability. While this series was unfortunately short-lived, it was one of the first examples of investors being hands-on and focusing on key parameters.
Hiring and Leadership
Reflecting on investment teams involved in the hiring process and sourcing of new candidates, Sushi, and its recent Head Chef (CEO) vote comes to mind.
A significant investor in Sushi, Arca, a large digital asset management firm, took a vocal position on how to fix the bleeding and devaluation of the SUSHI price.
While this proposal was initially rejected (welcome to Governance ;) ), it was an example of investors being deliberate about their goals and intentions for the DAO.
What they thought at the time — partnering with Frog Nation — offered the most promise.
For those who are less familiar with Frog Nation, good. it’s exactly as silly as it sounds.
To their credit, they boasted millions in TVL across four different product types. The proposal was tempting:
This roadmap invited participants and commentators from both communities (Sushi and Frog Nation) and revealed an intense passion for optimizing Sushi’s future.
This attempt never succeeded, however Arca achieved an important goal; illustrating the problems facing Sushi, depressing token-holder value, and a lack of clear leadership.
Frog Nation failed to usurp SushiSwap but their joint proposal lead the foundation for a long and bumpy road toward finding the next Head Chef. Congratulations to @Jared Gray!
Strategy
Last, but definitely not least, venture firms are directing the strategy DAOs from genesis. A recent and relevant example is 1kx, outlining the OBRA operating model for Safe DAO.
1kx, known for its mission “Token Maximalists,” is known for its hands-on approach to growing and deploying a token. A most recent example is SafeDAO, formerly known as GnosisSafe.
A key public good in the Ethereum and EVM, Safe {DAO} aims to transition the control of this tool to the community and a DAO:
This proposal — and its fun abbreviation, outlines an entirely new approach to allocating resources across the DAO. It favors KPIs and metrics over working groups, allowing Safe to rally beyond a key goal and mission; grow TVL. It defers to simplicity, as the design principles incorporate a powerful line: “keep it simple stupid (K.I.S.S.)”
1kx jumped into the forum to show the power of early competent Governance and a new way to design a DAO operating model. While this discussion is still in progress, it was the pinnacle of investors helping shape the future of a DAO.
This strategic initiative has the potential to influence Safe {DAO} and others to come.
What’s Next?
As investors become more scrutinous with deploying new capital, they are becoming more aware of the agency that governance holds. It is a way to directly improve your portfolio companies and do so in a public manner.
I mean the discussion board is literally called a “forum!”
As markets return to being more fruitful, deal flows will increase and power will flow from investors to founders.
I predict a future where founders are considering the value an investor can provide. The answer may easily be Governance — in not just one protocol, but many.
