Investment DAOs: How To Decentralize Venture Capital
|— The world of investment is cut-throat and it can be a massive process for teams to get funding to start or expand their projects. |
— The centralized and exclusionary culture of venture capital means giving up shares and losing some control to a central entity. It’s not ideal for small projects who rely on bigger firms to survive.
— Decentralized autonomous organizations (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.
— DAOs offer a way for communities to receive rewards, like voting rights, on a protocol while buying into a project, startup or idea that they truly back.
— It means more projects have access to funding and more people can find investment without needing to overcome the massive hurdles in traditional investment.
DAO’s might sound like a bit of a buzzword right now. In a practical sense, they are opening a lot of new doors for regular people. Check out this article to understand how a DAO can help you fund your project.
You’re starting a project and you need a little extra capital to get going. Or you’re about to expand and need that extra something. So you go to a vulture, sorry, venture capital firm to source that capital. The thing is you don’t want to give your shares away and lose your control. If only there was another way.
Well, there is: an Investment DAO. To explain, these protocols offer a way of raising capital without involving a predatory investor. But before we explore investment DAOs themselves, let’s explore the need for such structures in the first place.
The Problem With Traditional Venture Capital: Centralization
Well, in the world today, you have the big fish and the little fish; and everyone’s trying to “make it”.
To illustrate, the little fish go to the big fish and ask them for some capital. If the big fish likes the idea, they agree. In return, the little fish gives up some shares, accordingly relinquishing some control. As a result, the big fish gets a little bigger.
This reliance on just a few centralized entities means we’re left with a couple of insanely powerful entities at the top who can call the shots. Essentially, these few people act as gatekeepers to the idea pool. With a small group of people choosing which projects recieve funding, and which don’t, this causes issues. For business start-ups, it means good ideas go to waste when there’s a lack of business support. For the business ecosystem and the end-user, it means a lack of diversity.
Further, not everyone recieves a fair reward for their contribution. Those generating ideas must give up their decision-making power in order to recieve start-up capital. That means project founders lose the control over their project’s path from the moment they get started.
Sounds ridiculous, really, doesn’t it?
The Future of Funding: Decentralized Autonomous Organizations (DAOs)
Well, it’s not the only answer. Of course, democratizing capital is not a new idea. The rise of crowd-funding platforms is an example of how to raise money collectively to achieve an objective. But crowdfunding is more limited in its execution; let’s see how the blockchain differs.
Blockchain made two big advances for human organization: at its most basic, it made autonomous transfers of value possible, while the development of smart contracts enabled rules and relationships to exist to govern those transfers. And so, the DAO was born.
If you’re lost, make sure to check out the full guide on What a DAO is.
However, at the heart of it, a DAO is a community formed around a central idea that each member thinks is worth investing in. Money pooled within that DAO keeps track of each person’s contribution and gives proportionate governance rights.
What Is an Investment DAO?
With their capacity for raising capital around a central objective, and a ready made structure in place for governing how that capital is used, DAOs are quickly developing a reputation for being a very effective alternative to Venture Capital firms. Not surprisingly, a raft of different investment DAOs have sprung up with the goal of funding X, Y or Z concept.
Investment DAOs are a vehicle for democratized investment. Allowing capital to be raised around a nascent idea without relying on the approval of a large VC. More than this, they allow a far greater variety of ideas to be brought to life, by decentralizing the source of funding.
What Are Investment DAOs For?
Investment DAOs have several benefits, for investors, for projects and the business ecosystem as a whole.
DAOs for the Business Ecosystem Overall
Variety is not only the spice of life: it adds something to the business ecosystem too. The possibility of diversity in innovation is good for business and by avoiding the big gatekeepers DAOs help foster this. It’s not necessarily only about creating competitive products. It’s about giving the guy with the incredibly, maybe wild, maybe whacky idea to get his project off the ground and see where that might branch off. The success of innovation leads to more innovation. Opening the door to new ideas leads to a better, more diverse landscape for industries.
The Future of the Small Fish
DAOs open the door without relying on the red-tape-riddled approval from big corporations. Enabling the people that see the potential and value in a project to support it. Benefiting both from the profits and the diversity of the ecosystem.
Investment DAOs are still fairly new to the world. There are still things to iron out, but their possibilities are incredibly exciting. Decentralized capital means great ideas are no longer relying on the rich, but can be selected by the community itself. With DAOs like Syndicate removing the scary bits of the process, more people than ever can actively shape the options of the future.
DAOs for Projects
If a person has a big, interesting, whacky idea and is looking for funding. DAOs open the door without relying on the red-tape-riddled approval from big corporations. This boasts a double benefit: It means more access to different projects getting off the ground. Plus it leads to a fairer reward system for everyone involved. With DAO investment, any member helping fund the project has an active hand in the success of the project and receives a proportionate reward.
DAOs for Investors
In traditional finance, you need to be a big fish to be an investor. Money makes more money. But with DAOs, regular people are given access to a world of upcoming ideas. They get to be involved and help fund and participate in the success of a project and be compensated in return.
DAOs remove the need for a VC by enabling members of a community. The people that see the potential and value in a project – to provide liquidity to the project and receive a proportionate share of the spoils.
This means less control is given to the corporate heavyweights. More power is offered to a community that sees value in a project beyond the dollar figure.
Examples of Investment DAOs
You can use DAOs for any kind of crowd-funding objective.
For example, the Krause House DAO is a “community of hoop fanatics just crazy enough to buy an NBA team”. It’s a member-governed DOA made up of basketball fans committed to raising enough money to buy an NBA team. It’s taking fan participation to the next level. It also shows how DAOs are breaking the barriers of investment and allowing individuals to be involved in something they’re passionate about, rather than restricting things like NBA team ownership to the billionaires and corporations.
Meanwhile, ConstitutionDAO ran in 2021 and stood as an experiment to raise funds to bid on an original copy of the United States Constitution that was being auctioned at Sotheby’s. The DAO raised enough to place a verified bid on the auction (around $47 million).
Both these are great examples of projects that were able to subvert central financial gatekeepers to advance their idea.
How To Create An Investment DAO
Sounds great! So how exactly do you set up a DAO? Do you know how to manage the on-chain transactions, the smart contracts, the compliance and the legal bits?
If your heart just sank a bit, don’t worry, you’re not alone.
With Web2 platforms, setting up the framework required for a DAO could often be complicated and time-consuming. Putting off groups and individuals who could potentially have benefited from this model. On top of this, most DAOs use Discord and a fragmented toolkit for their operations. This comes with its own set of less than ideal obstacles. With tools like Collab.Land to manage communities and a Snapshot voting systems, issues like security and the potential for scam crop up.
This is where Syndicate DAO comes in.
How Syndicate Helps Build Investment DAOs
“Syndicate is revolutionizing investing by changing how communities and capital work together through accessible, effortless, and social web3 technologies.”
That’s Syndicate’s key phrase and how likable it captures the crucial points of an investment DAO is clear. It’s accessible, effortless, and it puts communities at the core of projects.
Syndicate is focused on making the complex-sounding process of setting up a blockchain based entity easy. The platform provides ready to go investment DAO templates that anyone can use to form Investment Clubs. These are basically DAOs that can be created in a matter of minutes using an Ethereum wallet as the foundation. It’s user-friendly with a neat UX design, but it has some amazing functionality that enables a pretty powerful DAO to be created. Your wallet becomes the DAO on which all things rest; deposits, community management, legal signing. All together, without the complexity of building it.
Syndicate DAO makes it easy for investors to pool money and invest in a project. Allowing you to manage both the on-chain and off-chain processes of your new DAO easily.
On the legal side, the platform has recently received support from Doola, a company that helps web2 and web3 entrepreneurs easily set up an LLC, C Corp, or DAO LLC in the U.S. This makes it easy for the DAOs to create the necessary legal documentation for the business.
Long-term, Syndicate also aims to be a community hub. Making it easy for new members to find DAOs they support and join them easily. Enabling the DAOs themselves to gain access to people who support their core idea.
In effect, Syndicate is decentralizing the ecosystem that decides the fate of your business idea. Removing the barriers that keep most ideas out and allowing capital to be seamlessly and democratically sourced from an expanding audience.
Knowledge is Power.
Keep on learning! Check out our School of Block episode all about DAOs to understand more about how these organizations are changing everything.