Investment DAOs are becoming a popular choice among investors. This guide breaks down this style of decentralized autonomous organization and how it taps into the power of Web3 to democratize the investment process and make it inclusive.
Before elaborating on the differences between traditional VC and investment DAOs, let us understand how traditional venture capital works.A venture capital fund is founded and managed by general partners . GPs are responsible for sourcing investment opportunities, performing due diligence and closing investments in a portfolio company.
Traditional venture capital has been a successful model that has catalyzed the growth of the internet, social media and many of the Web2 giants over the past three decades. Yet, it is not without its frictions and it is these that the Web3 model promises to address.As effective as the VC model has been, it still has its issues. They are not very inclusive and decision-making is quite centralized. VC is also considered a highly illiquid asset class by institutional investors.
This often can be a limitation not only to investing globally but also to being able to identify hyperlocal opportunities in the last mile of the world. A centralized team can only offer so much in terms of originations and deployment capabilities across the world.The other key issue with traditional VC is that it is an illiquid asset class. Capital deployed into these funds is often locked in for years.
Deal sourcing can be decentralized, just like governance. Imagine running a fund focused on technology for coffee farmers across the world. Having community members from Nicaragua to Indonesia certainly helps in sourcing the best last-mile investment opportunities. This allows investment vehicles to be more specialized, more global and yet highly local.
In offering this functionality, investment DAOs offer returns similar to those of traditional VCs, albeit with a lesser liquidity risk. This makes them a better investment vehicle just based on the risk-return profile.Every opportunity has its risks and vice versa; investment DAOs are no exceptions. Despite their structural superiority to traditional VCs, there are still areas that remain unclear.
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