You are building your own startup or starting a new project and you need an amount of capital to uphold. So you come to a venture capital firm to source that capital. However, the trouble is the centralized and exclusionary culture of venture capital means. It makes you give up shares and lose some control over a central entity, and you don’t want to. If only there were another way, that is definitely Investment DAO.
DAOs could be the blockchain’s solution to the problems in VC investment. DAO protocols offer a vehicle for community investment, giving room for projects to find funding without relinquishing shares to one major corporation.
What is Investment DAO?
DAO is a short name for a Decentralized Autonomous Organization. It is essentially a company that is governed by smart contracts.
There has a smart contract that manages all activities in DAO. The members within a DAO discuss proposals and make decisions that are then implemented using smart contracts. This platform even may function without human intervention and is unceasing due to its blockchain base layer. This conveys the fact that the governing framework will still endure on the blockchain even though DAO members lose interest or exit the organization.
DAOs typically make decisions through voting procedures using governance tokens that their members hold. Some DAOs allow any member to propose, while others demand members to have a certain amount of governance tokens. The more governance tokens a user has, the more influence they exert.
Investment DAOs are a democratized investment vehicle, allowing raise capital around an emergent idea without relying on the approval of a centralized VC. And more than this, by decentralizing the source of funding, they accept a far greater variety of ideas to be brought to life.
This investment platform usually operates on a set of principles by using a proposed mechanism. For instance, a DAO may be designed to invest in specific industry sectors, such as DeFi or GameFi protocols.
What is traditional Venture capital?
In a traditional venture capital firm, General Partners (GPs) found and manage all activities. In addition, they are responsible for sourcing investment opportunities, performing due diligence, and final investments in a portfolio ecosystem.
The role of the GPs is to make certain they boost finances from Limited Partners (LPs) and supply potential startups. They must carry out extraordinary due diligence, get investment committee approvals, and set up capital efficiently. As startups grow and provide returns to VCs, the VCs will return to LPs.
It has successfully catalyzed venture capital via the rise of the internet, social media, and Web2 giants over the last three decades. However, it still exists the frictions, which the Web3 version promises to address.
Traditional Venture Capital vs Investment DAO
Due to the amount of capital involved and the risk of the asset class, venture capital is mostly viable for sophisticated investors.
DAOs can be tokenized to allow investors to make smaller contributions, and are open to receiving investments from across the globe. However, the risk is still high.
A key challenge with traditional VC is that it’s an illiquid asset class with capital invested in these funds being locked for years, not until the VC fund has an exit with a respective project.
Investment DAOs can offer a token that derives its value from the underlying basket of crypto assets. At any point in time, an investor should be able to liquidate these tokens on a crypto exchange.
VC funds make investment decisions through an investment committee made up of a small group of people. This is a highly centralized system of governance.
DAOs have a decentralized governance system, where members can vote on investment proposals based on the number of tokens they hold.
The initial investment needed to invest in a VC fund is quite large, and most investors are either equity firms or institutional investors.
DAOs do not have high capital requirements and allow any retail investor to make small contributions.