DAO Winners & Losers

DAOs will change venture capital for the better

I just watched the opening 10 minute drum performance at DevCon, and it was actually pretty cool / less cringe than it may end up looking online.

Also on brand for the new “ETH is money” / “we’re not all vegans” direction some of the hardcore community has gone in recent months. More on DevCon tomorrow.

DAO Winners & Losers

There are a number of exciting applications of DAOs - distributed autonomous organizations - that we expect will emerge in the coming years.

Some of these were covered in our recent Unqualified Opinions podcast with Aaron Wright of OpenLaw. a16z’s Jesse Walden also had a terrific thread breaking down recent DAO experiments earlier this year.

It’s early, but DAOs are worth the hype, and this is the second straight Ethereum event I’ve attended where the buzz around them has been palpable.

Moreover, the industry may actually be mature enough technically to support some of these entities today, especially since Ethereum is triangulating on higher-value transaction settlement vs. high-throughput distributed applications.

It’s a far cry from 2016 when “The DAO” almost brought down Ethereum.

What am I excited about in particular?

  • Managing mutuals or “shared risk” pools, particularly in unique (read: more expensive) end markets of coverage. I’ve always liked the idea of cross-border insurance products in particular, as they fit into my “ethical, maybe technically illegal” bucket of crypto product innovations.

  • Coordinating and allocating “public” goods more efficiently…things like developer grants in crypto (MolochDAO), whistleblower or white hat hacker bounties, or simple charitable gifts.

  • VENTURE CAPITAL DISRUPTION

The last one is where I’ll offer thoughts today, because I’m sure someone will resurrect the venture capital DAO soon, and it’s going to be wildly misunderstood on all sides.

For starters, believe me: DAOs are NOT going to replace venture capitalists.

Startups and early-stage communities will always benefit from well-networked, strategic investors more than dumb pools of passive capital. In theory, a DAO could contain more well-connected, strategic investors than the venture capital community. In practice, early experiments are more likely to attract passive capital.

It’s difficult to drive any sort of meaningful, active engagement from community investment funds, which highlight the tragedy of the commons:

Someone still needs to do the work of sourcing/selecting deals, supporting investments, and shepherding them to some sort of positive financial exit. There’s too much wet code there, and it’s better to have a person or team with some sort of investment acumen and reputational skin in the game steering the ship.

This is especially true since venture capital is more competitive and easier to access than ever before. I don’t envision many scenarios where a crowd-curated DAO is able to access deals more efficiently than their Patagonia-cloaked counterparts. Early iterations will struggle with adverse selection issues.

The better way to look at DAOs is that they present a radical change in how easy it would be for venture capitalists to raise money from new LPs. This could give rise to a new type of strategic, value-added investor.

Imagine a DAO that raises $1 billion, but instead of allocating capital to investments, the entity allocates to new managers.

Who would be the winners and losers in that paradigm?

Winners: 

  • Emerging market investment targets. Fund managers with local ties and relationships could find it easier to raise money from a global capital pool and deploy resources to local teams.

  • Sin industries. It’s tough for major pensions or endowments to - even indirectly - fund porn, drugs, and gambling. Individuals, especially those who may be protected by anonymity, may have fewer inhibitions.

  • Mega long-term bets like virtual world infrastructure, space travel, quantum computing, etc. Things that no one but the tech oligopoly dares to fund because they don’t fit the typical 5-7 year investment horizon of VCs.

  • Global unaccredited investors. DAOs can take their money without the antiquated rules of the SEC.

  • Non-U.S. VCs. If DAOs open up massive pools of retail investment capital, US funds won’t necessarily be able to access them given restrictions they will have about accepting commitments from non-accredited investors.

  • Actual value-added individuals whose specialty is in communication/branding, network, and relationships. The first three people I thought of here were @melt_dem @katherinewu & @soona (all three moved to VC in the past two years, so maybe it’s moot), so maybe DAOs will also empower women GPs, in an industry biased against women and POC.

Losers: 

  • Late stage money. This is already a brutally competitive industry. You can envision highly specialized investment managers swooping in to late stage deals with “2 and 10” or even “2 and 5” structures in return for lower minimum return thresholds. They could pass more of the capital gains to DAO holders. Over time, this would drive market rates for “carry” down significantly for all but the very upper echelon of managers. (This seems like less of a risk in early stage VC.)

  • “Let me know how can I help and who else is investing” Patagonia-nites. It’s no longer valued or impressive to merely wear a vest and chase hot deals. Having a traditional fund becomes less of a moat as entrepreneurs can consider investments from managers who have access to potentially massive amounts of follow-on capital.

What do you think?

-TBI

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Content and thoughts from around the web as summarized by the Messari team.

🔐 [Analysis] Crypto Mega Theses - From April worth a Re-Read

Multicoin’s Kyle Samani broke down his firm’s three “mega theses” for crypto as an asset class. The firm invests in:

  1. Open finance infrastructure, tools that will support the interoperability, programmability, and composability of all financial assets (stocks, bonds, currencies) and global capital markets activity.

  2. Web3 infrastructure that will help power distributed applications and marketplaces and allow users control their own data and maintain sovereignty from trusted third parties.

  3. Non-state money, which the team believes will come from a digital store of value (e.g. bitcoin), the most useful reserve currencies that power smart contract platforms (e.g. ETH), and algorithmic stablecoins that optimize for price stability. 

It’s a must read piece on why crypto matters, and is a mental model consistent with our own at Messari.

Quick Bits (don't read that, I read it for you)

  • 🤔CME Group has no current plans to offer physically-settled bitcoin futures contracts according to global head of equity index and alternative investment products Tim McCourt. CME recently announced that it is going to launch bitcoin options contracts in Q1 of 2020, based on “increasing client demand” and “robust growth” in its bitcoin futures markets. (share or read more)

  • 😞 TipJar, a cryptocurrency micropayment service built on for ERC-20 tokens on the Ethereum blockchain network, is shutting down, The Block reports. A TipJar developer announced the news on Reddit on Sunday, saying that the service has lately received “very little activity.” (share or read more)

  • 🏛A class-action lawsuit was filed today against Bitfinex, Tether and others was filed in the United States District Court in the Southern District of New York, The Block reports. Relying on publicly available documents, plaintiffs describe a “sophisticated scheme that coopted a disruptive innovation — cryptocurrency — and used it to defraud investors, manipulate markets, and conceal illicit proceeds.” The new federal court class-action lawsuit alleges over $1.4 trillion in damages suffered by class members. (share or read more)

  • 💰NuCypher raised $10.7 million in new funding to help bring data privacy to decentralized applications (dApps) built on Ethereum ($ETH). The funds were raised via a SAFT (Simple Agreement for Future Tokens) at a valuation of $133 million. The round was led by Polychain Capital, with participation from Y Combinator, Bitmain, Bitfury, Arrington XRP Capital, and Notation Capital, among others. (share or read more)

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