Are DAO Funds the Future of Venture Capital?

DAO Disruption

The world of venture capital is a small and exclusive one. Even with the rise of angel investing, seed funding and incubators, most fledgling startups have a tough time getting the capital they need to grow their company.

The venture capital industry is dominated by large institutions and family offices. These players invest billions of dollars in venture firms each year to access promising startups. But as we’ve written previously, these VC firms are not well-suited to support the next generation of startups anymore.

But what if there was another way? What if there was a new kind of venture fund that not only gave smaller investors the opportunity to get in on the ground floor of the next Google or Facebook, but also allowed them to profit from their investment over time?

That’s exactly what Decentralized Autonomous Organization (DAO) funds aim to do.

What Is a DAO

A DAO is a type of fund that uses blockchain technology to create an automated investing system. These funds are managed by an autonomous software program that executes investments and returns based on the collective intelligence of its investors.

The DAO investment model has the potential to disrupt the $200 billion venture capital industry by democratizing investing. These funds use a distributed network of computers to manage assets. The computers in the network are owned and controlled by investors, much like a corporation is owned and controlled by shareholders. No one person or entity owns the computers in the network, so they can operate as a single unit to make decisions.

The computers in the network are programmed to follow a set of rules. If, for example, a certain level of consensus is reached by the computers in the network, then the assets held by the fund are transferred from one account to another. This is how assets are transferred between accounts, and it’s what makes a DAO fund a much more efficient way of managing funds than a traditional venture capital fund.

DAO Fund Basics

As investment DAOs are growing more and more common, it’s important to understand what they are and how exactly they function. As decentralized autonomous organizations, they offer a community approach to investment, allowing projects to obtain funding without relinquishing shares to just one large corporation. DAO investment funds eliminate the hierarchies of fund sourcing and, in short, allow more projects to have easier access to funding. Investors who are a part of DAOs form a “community,” which receives rewards while investing in a project they truly believe in.

In the past years, we’ve seen more and more DAO investment funds appear and make waves in the world of crypto.

OrangeDAO is a collective focused specifically on backing Web3 startups. Formed by a group of Y Combinator alumni (and allowing access only to other YC alumni), the fund’s objective is creating an investment structure that allows scouting and funding new startups. Not only that, OrangeDAO accompanies these startups beyond funding, by mentoring their leadership and recruitment talent, helping acquire clients, etc.

The LAO offers a slightly different approach, looking to bridge the gap between traditional legal agreements and the world of crypto. It provides its members with a legal structure that enables them to invest in blockchain projects and receive tokenized stock or utility tokens in exchange. Using a voting system, the LAO chooses startups and projects in need of funding, which comes from members who have purchased interest in The LAO.

VC3 DAO, created by a network of Kauffman Fellows, looks to build a venture investment model that follows the principles of Web3 and functions in a decentralized manner. This Web3 investment DAO brings together a vetted group of venture professionals, and in exchange for their investment, members receive tokens for deal flow, expertise, portfolio support, etc.

The recent announcement of Andreessen Horowitz’s US$4.5 billion fund for backing crypto and blockchain companies gives us a sense of the growing importance of these funds. Horowitz’s fund clearly shows us how Silicon Valley’s interest in crypto startups is expanding, and is likely to continue doing so.

Final Words

As the world of venture funding evolves, investors will look for new ways to invest in the next generation of tech companies. DAOs could be the next evolution in venture capital. These funds use blockchain technology to decentralize investments and open the doors to a much larger pool of investors.