Source: Empower Labs
Investment in DAO has a strong compliance structure.
There is no GP when investing in DAO. The essence of successful DAO investment is a successful member network.
Investing in DAO will not replace VC, but it will become an important force in the market and lead the market from time to time.
I was a guest on Web3 101 a few days ago and talked about how my friends and I invested in AI by organizing a DAO. After the podcast was released, many friends came to ask interested questions, and a considerable proportion of them focused on the details of investing in DAO, so I wanted to write an article to share it.
Before I start the introduction, I want to emphasize that there are many models for investing in DAO. The one I will introduce is a more mainstream one, but it does not cover the entire market.
If we look at the most influential investment DAOs on the market, such as The LAO, MetaCartel, and Flamingo, we will find that they adopt a similar model.
Semi-closed structure, no external fundraising.
There are registered entities, and some have bank accounts.
Strong compliance.
The upper limit of members is 99.
No GP, no management fees, and no carry.
DAO members need to invest funds and undergo KYC and Accredited Investor certification.
No assets are issued, and the rights and interests of the DAO are mapped to each specific member through a set of legal structures.
The reason why mainstream investment DAOs generally adopt similar models is that investment behavior involves asset holding, asset appreciation, dividends, etc. There is no room to circumvent supervision. Compliance is critical to keeping members safe and investments safe.
Strong compliance naturally means high barriers to entry, thus dissuading most people in the market who want to participate. But this is not a problem when investing in DAO. This involves an element that is more important than technical compliance in investing in DAO - The composition of the member network.
A successful investment DAO does not depend on the number of people, but on the ability to build a high-quality member network. The compliance structure requires that investment DAO members cannot exceed 99 people. In fact, no investment DAO has ever exhausted this limit. Even the most popular investment DAO has a scale of about 60 people, and more are 20-40 people.
Investment in DAO is an investment institution without a GP, so the work of the GP will be borne by each member. Can such a grassroots team participate in their spare time, can they obtain enough deal sources, can they form efficient and reasonable decisions, are the founders willing to take money from such an organization, how can they help the portfolio after the investment, and how should the exit strategy be designed? and execution, each of which is a test for members.
Soit is not enough to just contribute money. Most members need to have great enthusiasm for the field they invest in and be able to continue to make effective contributions. Contribution can be sharing deal sources, capturing public market opportunities in a timely manner, having rich investment experience for judging projects, or having specific capabilities in a specific field that can complement others. Generally speaking, it is best to have a certain proportion of members who are good at external output and work together to create a greater volume. Leading institutions like A16z are very good at content output and benefit from it, and the same goes for investing in DAO.
Take this AI-themed investment DAO as an example. The idea was conceived in October 2022, and the official launch was in February 2023. In these four months, in addition to preparing the appropriate structure, most of the time was spent on personnel curation, that is, selecting people. Each member’s invitation was discussed and communicated in depth. There are currently about 30 members, including founders of AI projects, game studios, and several other technology fields, as well as Emmy Award-winning producers, AI scientists from major companies, legal experts, and investors in the DAO field. Old guns, and even traditional investors who have invested in almost all outer space projects. Of course, those who are most familiar with DAO are those in the crypto community, so the highest proportion are investors from various crypto funds, accounting for almost half. Geographically, we have the most people in the San Francisco Bay Area, the home base of this round of AI innovation, and we also have a certain distribution in the eastern United States, Europe and Asia. This diversified background is the key to being able to access a large number of high-quality deals in the early stages.
Of course, choosing people is a two-way choice. If you choose others, they will choose you. There are also friends that we really hoped to bring in, but after communicating with them, they did not join in the end. This is also normal.
Many investments in DAO have begun to achieve results. A common question is, Will investing in DAO replace VC? My answer is clear, no.
There are huge differences in the positioning and operation methods of the two. No matter from the perspective of market positioning or the amount of funds, investing in DAO has no possibility of replacing VC. But this does not mean that my judgment on the prospects of investing in DAO is pessimistic. On the contrary, I think that as investment in DAOs gradually achieves good results, and as the penetration rate of this concept becomes higher and higher, investment DAOs in various subdivisions will emerge in large numbers.
Now we can see investment in DAO focusing on zero-knowledge proofs, DeSci, generative art, DeFi, Web3 games and other different directions, mainly in the encryption field. But investing in DAO does not have to be limited to encryption. Our AI-themed investment DAO has broken through the encryption market and entered the broader AI investment field. Not only can we invest in projects, but the quality of the projects we invest in is online, thus verifying This model is also tenable in the traditional investment market.
In the future, investing in DAO will gradually leave the encryption circle and enter the broader investment world. In another year or two, we may see investment DAOs focusing on different themes such as life sciences, quantum technology, robotics, film and television, etc. Investing in DAO will gradually become a force in the investment market and coexist with VC in the long term.
The advantages of investing in DAO are theme focus, collective wisdom and collective strength. A small group that is diverse enough and has good insights can make forward-looking judgments in many fields through long-term internal wisdom collision and lead the market through collective voice.