Companies and Capital : Unbundled and Modularized

Venture Capital has seen multiple threats to its core business over the last 20 years, but none have been existential to date.

• Angelist proliferated angel investing and syndicates, allowing often well connected founders to invest one in another
• Equity Crowdfunding enabled businesses to raise from unaccredited investors, however the value add from a retail crowd making small $ investments is rather limited
• Solo Capitalists and micro GPs differentiating with brand, faster process and founder friendly terms have become increasingly competitive with traditional venture firms.
• ICOs and liquidity mining enabled crypto native businesses to directly raise capital to finance operations or support DEX Liquidity, but sustainability of reward programs and user retention has been an issue.
• Investment DAOs emerged to curate capital, but the costs of coordination, the lack of post investment value, lack of incentives (due to no fees) and regulatory uncertainty has limited their widespread adoption to date.

At the same time, there are a number of intersecting trends that are evolving the startup cap table.

Capital

Fewer Late Stage Rounds — Web3 native go-to-market strategies introduce the idea that there might only be one equity fundraising round to build the initial product, with successive milestones financed by the public markets. Liquidity mining becomes growth hacking, fundraising and a go to market strategy all in one.

More Capital — With great abundance of capital and fewer later stage rounds to deploy to, capital has increasingly become a commodity. With more fundraising options at a founder’s disposal — angels, syndicates, solo/micro GPs, venture funds, ICO/IDO, SPVs and investment daos, founders (in good markets) can afford to be discerning of who actually adds value.

Lower Startup Cost, Time to Market — Additionally, the barriers to entry for startups are lower. Whereas a startup used to need hundreds of thousands of dollars for servers alone, a solo founder with some coding skills and a few grand of infrastructure credits can bootstrap a prototype for a business and/or raise small amounts from others in their network.

The particular need for venture financing is further reduced in an open source environment where founders have layers of composable tooling to repurpose. With time and cost to market reduced (and to liquidity), the traditional need to fund ambitious multi-year roadmaps to hit product market fit could be replaced with capital efficient tinkering funded by close social networks.

Borderless Capital and Labor, High Velocity Tinkering — The composability of crypto also increases the velocity of experimentation, an effect we felt viscerally in the bull market as we all tried to manically track every new release. As the labor and capital markets increasingly become borderless, the one-size-fits-all approach of venture seems ill-suited to get to the edges of innovation as its pace hits a vertical asymptote. Web3 sector agnostic VCs are essentially attempting to track the growth of…the internet.

So if VCs are declining as a share of Web3 cap tables, who will replace their share?

Labor

Users — Users now have an opportunity to earn value for their contributions to bootstrapping networks, the killer application of blockchains. While initial rewards programs have been clunkily administered, ownership is arguably the most salient differentiator of what “web3” is. The web is now ownable; only businesses that know how to cultivate and reward their communities will stand out in the noise.

Service DAOs — Service DAOs bundle talented contributors by profession to serve other DAOs in exchange for sweat equity. Service DAOs are the worker owned co-ops of the web. They could be viewed as substitutes for consultants, modular alternatives for hiring teams one by one, or as an unbundling of venture value-add — essentially an unbundled a16z platform. Interestingly, service DAOs could invest in a fund/services business hybrid structure and earn equity through both labor and capital provision at better economics than traditional funds. Furthermore, the natural evolution of a web3 native organization has trended towards the organic formation of sub-DAOs / pods / squads with uniquely assigned governance powers. In a way, it makes sense to just cut out steps and combine and disband roaming internet guilds for the sake of speed and talent output consistency.

Shared Carry — distributing fees to external community members is another interesting way that traditional 2/20 funds can encourage their network to share and diligence deal flow and provide post-investment support for a portion of GP management and performance fees.

Generally you might say:

Venture capital is being unbundled and modularized. Labor is being bundled and modularized.

However, I’ll end by saying there is no capital vehicle that fits all investment types, nor any certainty that these newer experiments will be successful. New relations between people facilitated by new labor and capital structures are only relevant if they lead to better outcomes and higher efficiency.

For example, larger venture investments are still best suited for more expensive infrastructure and middleware buildouts where time to liquidity or market is high. Additionally, for winner-take-all markets, large capital injections may be needed to get market share.

On the other hand, while investment DAOs lack good incentives and coordination, they do just fine coordinating individuals and institutions to invest in a single startup, NFT or other community owned digital asset. The larger you expand an investment group, more / potentially better deal flow and more eyes to diligence could come at the cost of watering down contrarian theses, lack of incentives and slowing decision making.

It’s an open question how web3 cap tables will evolve, but broadly I would bet that we see sovereign individuals tinkering and funding one another at the edges, voluntarily forming and disbanding collectives to do so.