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The Future of Venture Capital
Will crypto style decentralized autonomous organisations change the face of private equity?
Venture capital is changing. Over the last two decades an increasing number of firms have set themselves up as funds for innovation. It seems even Donald Trump’s son in law, Jared Kushner, has launched a multi billion dollar private equity fund to invest in Trump Social, er, a range of Internet and other exciting businesses.
At this point Kushner only has experience in real estate investing which might not seem the most obvious segue to high tech, but then it seems ‘anything goes and no one knows’ in the wacky new world of crypto, NFT’s and Metaverse - so why shouldn’t Jared have a go?!
And given the hot new distributed nature of fund raising in politics, maybe private funds will follow. A personal PAC for Kleiner Perkins aka Trump-style money from the masses?
Well, the ‘why’ might lie in the tough years ahead tackling some of the world's most pressing issues. You know, which cryptocurrency to invest in, (there are 2,000 and counting), which NFT art thingy to collect and which version of the Metaverse to place your digital Nike’s on?
Or, we might want to start investing in stuff that will keep us on this planet a few more years. You know, like climate investing.
Apparently there is not enough attention or money for capital intensive climate solving businesses (try saying that after a night out). Venture capitalists, once cheerleaders of green energy, are more infatuated with cryptocurrencies and start-ups that deliver beer, cars and groceries within minutes. Not necessarily in that order.
Last year, venture capitalists invested $11.9 billion in renewable energy globally, compared with $30.1 billion in cryptocurrency and blockchain, according to PitchBook.
They go on to state that of the $106 billion invested by venture capitalists in European start-ups last year, just 4 percent went into energy investments.
Is there something wrong with venture capital? Has it become too much about fast money into super trendy ventures to ensure earning the quick buck? Or is the problem with the people at the top? After all, there seems to be no lack of money. And if Kushner can raise over $1 billion from the Saudi wealth fund then, at least, we all know what we have to do to get some of that cash.
Others are looking at a new future, one developed from Bitcoin.
Mind you, there might be another way. Imagine if you could establish a venture capital kind of co-op fund with other people around the world, without knowing each other and establishing your own rules, and making your own decisions autonomously all encoded on a Blockchain? While it sounds like a night out at a masked ball and wild as it might seem, DAOs are making this real.
Wikipedia defines “DAO (Decentralized Autonomous Organization) as an organisation represented by rules encoded as a transparent computer program, controlled by the organisation members, and not influenced by a central government. As the rules are embedded into the code, no managers are needed, thus removing any bureaucracy or hierarchy hurdles”.
Which presumably means that entrepreneurs pitch to a computer and not some spotty dude with an MBA and the startup credentials of, well, Jared.
Some of today's internet users and the next generations are looking forward to starting more socially minded organisations, searching for an answer to: “How can we exchange values in a trusted environment?” Or, “how do I stuff an organisation into my computer game?”
Blockchain enables automated trusted transactions and value exchanges, but even so, internet users around the world want to organise themselves in a “Safe and effective way to work with like-minded folks, around the globe”, according to Ethereum.
This might all sound like gobbledygook and a little self serving given that Ethereum provides a platform to make this happen, but we should recognise that the future will increasingly get defined by Generation Z folk that spend their waking life surgically attached to a computer screen, don’t really like the idea of ‘corporation’ and want to work as much as possible from home so no one can see their screen split between crypto trading and Fortnite.
Gen Z all do multi-player gaming so why not multi-player organisations as well?
Bitcoin is generally considered to be the first fully functional DAO, as it has programmed rules, functions autonomously, and is coordinated through a consensual protocol. Which means you don’t actually have to talk to other people. Just set the rules in a smart contract and bingo!
A DAO’s financial transactions and rules are recorded on a blockchain. This eliminates the need to involve a third party in a financial transaction, simplifying them through smart contracts. The firmness of a DAO is in the smart contract. A bit like the firmness of your shake is dictated by your hand - or is it the other way around?
The smart contract represents the rules of the organisation and holds the organization’s storage, which takes us full circle back to the problem of not enough greentech investment because they dig storage too. No one can edit DAO’s organisational rules without people noticing, because they are transparent and public.
Up to today we are used to companies backed by legal status, a DAO can function without it as it can be structured as a general partnership. Saying that, apparently the legal status of DAO’s are somewhat undetermined??!!
In comparison to traditional companies, DAOs have a democratised organisation. All the members of a DAO need to vote for any changes to be implemented, instead of implemented changes by a sole party (depending on the company’s structure). The funding of DAOs is mainly based on crowdfunding that issues tokens. And the governance is based on community, which takes us all the way back to the multi-player thing.
DAO’s need a set of rules by which they operate, a funding like tokens that the organisation can spend to reward certain activities to their members, and also to provide voting rights for establishing the operation rules. And, most importantly, a secure structure that allows every investor to configure the organisation to better dodge the arrows in Minecraft or when the SEC finally shows up.
In 2016, a specific DAO, "The DAO", set a record for the largest crowdfunding campaign to date (but obviously no record for original branding). Unfortunately there was one small catch. Its operational procedure allowed investors to withdraw at will any money that had not yet been committed to a project; the funds could thus deplete quickly. Although there were safeguards aimed to prevent gaming shareholders' votes to win investments there were a "number of security vulnerabilities".
These enabled an attempted multi-million dollar withdrawal of funds from The DAO to be initiated in mid-June 2016. On July 20, 2016, the Ethereum blockchain was forked to bail out the original contract. Which kinda put the lid on the first attempt at a venture capital style DAO whilst at the same time putting the skids on the hottest new cryptocurrency of the time. Proving that ripping off investors isn’t just a Madoff trick.
And right when it looked like things couldn’t look worse for the early DAO’s up popped Build Finance DAO.
Build Finance taught us that DAOs can also be subject to coups or hostile takeovers that upend its voting structures especially if the voting power is based upon the amount of tokens one owns. An example of this occurred in 2022, when Build Finance DAO suffered a coup in which one person amassed enough tokens to get a vote passed, then voted to give themselves full control of the DAO, then, using this power, they drained all of the money from the DAO.
Proving that some things need to be regulated/overseen by grown-ups/not treated like a multi-player game!
But, right when you might be forgiven for thinking that DAO’s are clearly not the answer to venture capital 3.0 we get to ask ourselves if some kind of hybrid form might work. After all, Bitcoin has been a huge success and Uniswap might be worth an exchange rated flutter. So no need to bury your hands in your head over the chipset chatter on DAO Discord’s.
After all, the idea of greater transparency sounds good. The concept of a more participatory model for investors, or at least the ‘super investors’ sounds interesting. Something that adds a form of broader investor involvement in the underlying businesses could make a difference. And a model whereby work is shared and rewarded with tokens makes a heap of sense, particularly when it seems like the biggest constraint to making a hill of beans (or is it Beenz) is hiring the right people.
Perhaps some kind of managed, regulated DAO without multi-player gaming features which keeps more of the money flowing to invested companies to support their progress rather than to somewhat ineffective traditional partner structures, over generous fees, or overly purist and insecure DAO’s might point to a future model for ‘participatory’ venture capital. And, of course, one that is backed by Bitcoin, purely to soup it up a little. Just not the Madoff way!
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