Venture Capital(VC) DAO is a concept wherein individuals that are providing funds for new projects launched via the DAO, also control all decisions made by the DAO — via decentralized means, or in other words — via computer code utilization. The best way to define a VC DAO is as a permissionless primary market infrastructure governed by code and community.
This is a relatively new idea that sprung into reality in the year 2016 in the form of an organization called simply — ’DAO’.
The aforementioned concept is extremely important for the progress of humanity in the new era of global adoption of the blockchain technology — however the full realization of the concept was blocked in the past by poorly written code that resulted in funds being siphoned from the organization and the eventual demise of the organization called ‘DAO’.
Before we delve deeper into the importance and functionality of a successful & error-proof VC DAO — let us first understand how the ‘classical’ Venture Capital ecosystem evolved, what are its fundamental properties & drawbacks, as well as where it is headed.
Venture Capital
Financing new ideas is the key to human prosperity as well the key for the sustainable development of our global society & economy. This has proven to be especially true during the second half of the 20th century when Venture Capital was ‘born’ and played a key role in the development of Silicon Valley, and consequently — in the initialization of the digital era. Venture capital also played a key role in the boom of the Internet.
The phenomenon of Venture Capital was born for very simple reasons — banks are unwilling to provide loans to recently founded companies that operate in markets that change rapidly, are afflicted with uncertainty and possess few tangible assets which could act as a collateral for a loan. This is where Venture Capital stepped in and provided resources necessary for development & commercialization of new ideas.
Since its inception in the mid-20th century — the Venture Capital concept has evolved immensely, morphing from the concept whereby wealthy individuals funded teams with bright ideas — to a concept whereby extremely large investment companies & funds execute and manage funding. This evolution shifted the primary decision making in the Venture Capital sector from the wealthy individuals to fund managers that are not the original providers of funds.
The aforementioned evolution has caused Venture Capital to increase in size and complexity which has certainly bestowed beneficial effects upon virtually every sector — however there are significant downsides to this evolution. During the birth and initial phase of Venture Capital, as mentioned before — wealthy individuals were the ones assessing projects & ideas, and providing funding. These individuals were not, in most cases, driven exclusively by profit — and sought ideas that will also benefit mankind.
Today, the contrary is true, as the Venture Capital industry is dominated by fund managers which are exactly that — fund managers, which seek to maximize profits, and not curate humanity’s advancement. Consequently, projects that provide significant benefits to the global society but do not provide significant returns, such as open source projects — are left out. Recently, this funding gap has started to shrink with the appearance of funding platforms and the return of individual investors which are not exclusively driven by profit. The gap is however, much too great — and a solution is necessary if we are to live in a sustainable future.
It has been estimated that more than 80% of the money invested by venture capitalists goes into building the infrastructure required to grow the business. As such, Venture Capital is a critical component in the growth of society and it will be a critical component in achieving true prosperity around the globe.
But to do the aforementioned — Venture Capital needs to change, it needs to aim for sustainability, it needs to divert its exclusive attention to profit, and it needs to seek cohesion with ‘retail investors’ that are more than willing to fund ideas that will build a better tomorrow.
Here, we will present a quote Bob Zider, who was at the time of writing & publishing it — a president of a private investment company:
“The system … works well for the players it serves: entrepreneurs[that receive an investment], institutional investors, investment bankers, and the venture capitalists themselves. It also serves the supporting cast of lawyers, advisers, and accountants. Whether it meets the needs of the investing public is still an open question.”
Considering this quote is more than 20 years old, and considering in the last 20 years no significant ideological changes were made in the Venture Capital sector, aside from further sophistication, it is safe to say that sustainability and funding of beneficial projects with lower returns are not on the VC agenda, and hence — we must take things into our own hands.
VC DAO — the solution for a brighter and sustainable future
A brighter and a sustainable future can only be achieved by empowering the ‘everyday person’ that is generally far more willing to support public goods projects — than fund managers. Public goods are projects that generate immense benefits as they are by their own definition non-exclusionary and non-rivalrous, whereby a great example of a public good is open-source code. MetaMask and Uniswap are good examples of open-source code that generate immense benefits.
So far the best model that has been thought-up, which is intended to empower these ‘everyday persons’ willing to invest in a better future — is the Quadratic Funding model. The Quadratic funding model is designed to provide the largest amount of funding to projects that are supported by the largest amount of individuals. It is natural to assume that projects that draw the most attention from ‘everyday persons’ will almost certainly be projects that aim to bring prosperity or benefits on a broad spectrum — rather than to a select few.
As such a VC DAO, that is essentially a launchpad for new projects which are looking to make the world a better place, for everyone — must include the possibility of funding via the Quadratic Funding model.
By the very definition of the DAO — one person can provide only one vote, and one individual must not succeed in cheating the system by pretending to be multiple individuals in order to game the system. Hence it is of utmost importance that a VC DAO implements a mechanism to recognize individuals in such a way that each individual is only able to cast a single vote per voting process, or provide a single investment to projects utilizing the Quadratic Funding model.
Otherwise the very foundation of the VC DAO is undermined and is likely doomed to fail.
Retrospective funding is likewise a very important mechanism that should be implemented in a VC DAO — as it is much easier for a community to decide what was useful — than what is useful. This way teams and individuals that create the greatest benefits on a broad spectrum will be rewarded — whereby they will be incentivized to continue to do so.
To conclude this section — it is certainly of utmost importance that the tokens that are utilized for the governance and functionality of a VC DAO are not ‘premined’ and provided to a small number of individuals such as team members and initial investors of the VC DAO that sponsored the development. If that is indeed the case — then the Decentralized Autonomous Organization is essentially turned into a Centralized Autonomous Organization.
Our Vision of the VC DAO
To avoid the possible shortcomings that the first VC DAO experienced, as well as ensure that all the stages of the VC DAO are handled with an appropriate approach — we have separated the growth and development of the L2PAD platform into four stages. Each stage will have very different mechanisms & tokenomics in place, whereby the full decentralization and implementation of the DAO will happen in the last of the four stages — after which the real revolution begins, fully in the hands of the DAO participants.
Utilization of different mechanisms in each stage of our VC DAO platform development also addresses the issue of scalability that many launchpads have experienced.
The L2PAD platform will likewise utilize a mechanism that is intended to recognize individuals trying to cheat the decentralized system by acting as multiple individuals — this will not, however, make our platform permissionless. The permissionless characteristic is imperative for a functional & successful VC DAO.
Even though the Venture Capital industry nurtures economic prosperity and greatly benefits the progress of mankind in general — it also retains the majority of capital gains. This will be changed with the emerging VC DAO concept that will spread out these gains fairly — to all participants of the VC DAO ecosystem.
The L2PAD VC DAO will achieve this via a dual token approach whereby one type of token will be utilized for governance, and the other will be used exactly for the spread of these gains. This will be accomplished by providing users of the VC DAO with tokens that contain exposure to all projects that have launched via the platform.
Projects launching via the platform must be selected by the community itself in a fully permissionless way — as it will be the case with L2PAD, otherwise the platform is not truly decentralized, and such a platform could not be considered a VC DAO. This means projects will be able to apply their ideas & projects to the platform — without hindrance, and the community will vote which projects will attempt to perform a fundraiser via the VC DAO.
Some projects that apply, even though they propose to create an immensely useful public good, simply might not be ready for the issuance of their own tokens. This is why a fully fledged VC DAO must be able to provide infrastructure for non-mintable token issuance.
Finally, a fully fledged VC DAO must be able to provide liquidity locks against ‘rugpulls’ as well as many different types of funding styles — which can accommodate a large variety of projects.
By executing and implementing all the aforementioned characteristics & mechanisms into a VC DAO — the L2PAD team will build an infrastructure capable of empowering the community and realizing the true potential of mankind.
