This article was first published on Tech in Asia.
As crypto fever sweeps over global venture capital, some VC firms are taking a deeper plunge.
In March, US-based Bessemer Venture Partners announced that it was launching BessemarDAO, a Web3 community that offers additional portfolio services "in a decentralized manner."
Bessemer isn't the first to reimagine venture funding in the Web 3.0 era. Stacker Ventures, another US-based VC firm, also ditched the old playbook when it remade itself into a decentralized autonomous organization (DAO) in early 2021.
Both BessermerDAO and Stacker Ventures are a nod to the growing influence of venture DAOs like MetaCartel and Global Coin Research, where investment decisions and assets are managed by all members of organization instead of just a small team of professionals.
No Southeast Asian VC has followed suit yet, but some that Tech in Asia spoke to are already members of various venture DAOs and communities focused on non-fungible tokens or NFTs.
Are venture DAOs the next stage for venture capital? These new entities can surpass traditional VCs in some respects, but instead of locking horns, they might make inseparable bedfellows instead.
Bigger, better, faster stronger?
To be clear, venture DAOs have several advantages over traditional VC firms.
Raising funds from venture DAOs, for example, often comes with lower requirements.
"Startups often need only post a white paper or pitch on Discord to raise funds," says Katherine Ng of TZ APAC. With smart contracts doing most of the heavy lifting, this often cuts the fundraising process from a few months to a week.
"There's no need for multiple stages too, since everything works via smart contracts," says Ng, who is the marketing and operations head at the Singapore-based Tezo blockchain adoption entity.
Most VCs take "well over" 12 months to raise funds internally and need an average of three to six months to close a deal, according to executive Adrian Chng. He is the founder and chairman of Fintonia Group, an entrepreneurial financial services firm based in Singapore.
In contrast, FlamingoDAO, which was formed in October 2020, had already secured US$10 million in pooled funds and acquired nearly 600 to 700 NFTs by April 2021. While that's not an apples-to-apples comparison, it does indicates how fast venture DAOs can move.
Not only is fundraising from a venture DAO quicker, but it's also more transparent in some ways. Unlike the conventional fundraising process that involves complex capitalization tables and term sheets, startup founders only need to audit the smart contract issues by venture DAOS.
As the backbone of DAOs, smart contracts define organizational rules and self-execute events that meet certain conditions. In venture DAOs, smart contracts automatically disburse funding for projects that satisfy conditions that have been agreed upon by members of the organization.
Operating as a venture DAO also comes with other benefits.
For one, these entities enjoy lower operating costs by outsourcing services like legal counsel and communications to members within the DAO, according to Lemniscap, a blockchain investment firm. Since they may be DAO members themselves, "subject-matter experts or service providers may also render their services to DAO at discounted rates," a Lemniscap spokesperson adds.
Risk abound
Despite its advantages, venture DAOs come with many caveats.
For one, the fundraising edge that venture DAOs apparently have over traditional VCs may not stand up to scrutiny. "Venture DAOs could help startups raise funding faster, but the origin of funds raised could be questionable if the level of know-you-customer [process] is subpar," warns Ng of TZ APAC.
Traditional VCs also have established operational capabilities that most DAOs still haven't fully emulated, say Fintonia's Chng. While not standard practice, some VC count "operating partners" within their ranks. "This can include providing experts to support portfolio companies within growth marketing, talent acquisition, sales force effectiveness, and product management," he says.
And unlike traditional VCs that support their portfolio startups full time as close-knit teams, members of venture DAOs tend to have varying levels of commitment and expertise.
Low governance participation rates in some venture DAOs as well as the prevalence of rug pulls by anonymous teams and other crypto scams could also present additional risks to venture DAOs.
Take the issues that MakerDAO is grappling with, for example. The DeFi entity used to have "40 to 50 voters" per project, but the number went down because of high gas fees on the Ethereum blockchain, says Jocelyn Chang, growth lead for Asia Pacific.
Of 901,000 Maker tokens in circulation in November 2021, only 20% were protecting MakerDAO's protocol from governance attacks. Slightly less than 9% of Maker tokens also voted on the latest executive proposal at the time.
There's also an elephant in the room that needs to be addressed: regulatory risk. While traditional VC firms are regulated entities, venture DAOs are nascent entities with scant regulations governing them. One exception would a DAO law that was passed in the US state of Wyoming in mid-2021.
This ambiguity might be a short-tem boon as it allows venture DAOs to experiment with various structures. However, the long-term implications on the legality of structures that venture DAOs can take are unclear.
Stronger together
These features of venture DAOs suggest that they are more likely to complement traditional VC firms instead of competing with them.
"Strong and tight-knit communities formed around DAOs can offer much more efficient and faster sourcing. On the other hand, VCs combine a way more laser-focused and target value-add approach," explains the Lemniscap spokesperson.
This marriage of virtues is precisely what Bessemer had in mind when it launched BessemerDAO earlier this month.
Instead of serving as an alternative investment vehicle, BessemerDAO acts as a platform for crowdsourcing additional VC portfolio services by having startups funded by the VC firm as well as tech executives and individuals from non-Bessemer startups in the community.
BessemerDAO will serve as a platform for members to "surce talent and business development opportunities," leverage on each other's expertise, and validate product and investment ideas, according to the VC firm.
Partnering with traditional VCs might also help venture DAOs find the right structure and comply with regulations. Som DAOs like US-based The LAO (limited liability autonomous organization) operate on top of a Delaware-registered LLC. However, it is still up in the air whether similar arrangements will take shape outside Delaware, let alone beyond the US.
On the flipside, traditional firms on the hunt for blockchain-native startups and talent are finding venture DAOs invaluable. They allow traditional VC firms to dabble in Web3 without investing too much time and effort or breaking their investment mandate.
Venture DAOs have also proven indispensable to traditional VCs in terms of their sourcing capabilities. A large network lets traditional VCs leverage a more diverse set of expertise at a swifter pace.
Still, things often don't look so good under the hood. Instead of gaining access to a network of readily available experts, startups may find that some venture DAOs are run by just "a handful of exceptionally committed individuals carrying out the majority of the work and coordination," notes the Lemniscap spokesperson.
Ng of TZ APAC thinks that are their core, DAOs are ultimately "a means of galvanize collective action." Many DAOs are still figuring out what sort of structures they need to organize themselves, and teaming up with traditional VCs can buy time as they work towards long-term relevance.
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