How DAOs are Challenging VCs in the Race to Fund Web3 Projects

Lukas Schor writes about how DAOs are challenging the traditional model venture capitalists have long used to invest in tech startups.

By: Lukas Schor Loading...

How DAOs are Challenging VCs in the Race to Fund Web3 Projects

Investment in crypto and blockchain startups rose significantly in 2021 and changed how venture capital funding is received in Web3 projects. Now with the emergence of Decentralised Autonomous Organisations (DAOs), traditional VCs are facing competition. They have to rethink how they help companies raise money.

Despite a rocky start in 2016, DAOs have adapted and changed. Some early examples include dxDAO, DAOStack’s Genesis DAO, or MolochDAO, which have paved the way for more recent projects. Following on from surging interest in decentralised finance (DeFi) and non-fungible tokens (NFTs), DAOs are one of the most interesting topics in crypto right now.

Crypto communities springing up as DAOs are pooling their funds in DAO treasuries and enabling members to vote and decide how the project should be managed. VCs are no longer monopolizing the funding scene, and they’ll have to change how they operate, how they invest in projects, and what value, if any, they bring to the table, particularly as Web3 grows.

Web3 Offers New Investment Opportunities

VCs traditionally invest in early-stage companies in exchange for equity. However, Web3 has changed this by replacing equity with tokens to capture value. SushiSwap, a decentralised exchange that is also a DAO, has around 74,000 token holders. When VCs came knocking wanting a slice of the pie, Sushi holders questioned the VCs commitment to the protocol’s future, asking them to prove how they would add value.

Web3 investing also allows investors to fund new asset classes like NFTs, as noted by the NFT-centric Flamingo DAO. For now though, it appears that VCs are cautiously making a move investing in NFTs.Silicon valley VC firm a16z has invested in NFT marketplace OpenSea and Lightspeed Ventures joined forces with Solana’s investarm arm, Solana Ventures, to fund Web3 gaming projects. Elsewhere, contracts can be tokenized like debt as with Centrifuge and signed contracts can be hashed and act like a POAP (Proof of Attendance Protocol) with Web3.

Web3 provides the foundation for trusted transactions without needing to trust those involved, whereas DAOs are giving startups the ability to raise money without the need for third parties. As Web3 and DAOs align, they have the potential to bring about great changes for funding projects.

VCs Turning to DAOs

Venture capital in its modern form has been around since the 1970s. With DAOs representing the next generation of VC funding, VCs are not only investing and participating in DAOs, but are becoming DAOs. Stacker Ventures is one example of a VC becoming a DAO, which is aiding early-stage investing in emerging assets.

a16z, a venture capital firm, is another example of a company getting involved in the DAO space, particularly in governance, for example with Uniswap, a decentralised finance (DeFi) protocol. IDEO CoLab, an early stage investment fund focused on blockchain development, is also doing interesting direct involvement and filed for a $100M crypto fund with the SEC.

The future-gazing VCs that have already realised that DAOs will pave the way for a far more dynamic way for organisations to function, are investing into it early. Crypto startup Layer3, which provides tools for decentralized autonomous organizations (DAOs), recently raised $2.5M in a seed funding round which was led by traditional venture capitalists and angel investors.

Changing the Status Quo

VCs understand the significance of DAOs, which is why many are providing seed funding to investment DAOs. As Web3 and DAOs come together and show that there are other ways of raising money for various projects, VCs are realising they need to demonstrate what value they can bring in this new funding era. To avoid being left behind, it’s up to VCs to get on board when it relates to the potential that DAOs deliver; only then can VCs stay relevant.

Lukas Schor is the product manager at Gnosis Safe, a digital asset platform.