3 ways to structure your investment DAO to beat traditional venture capital
One of the clearest use cases for DAOs is coordinating capital among large groups of people. Whether it’s dreams of Lambos or the hope of driving societal change, many have seen the opportunity to use DAOs to coordinate venture capital and use the DAO's membership as a strategic advantage over centralized VC fund models. (Jack, are you listening?)
Venture DAOs can level up on traditional VC both pre- and post-investment. Pre-investment, DAO members can use their broad networks to create a vast and diverse deal pipeline (how else will you find the next mutant animal JPEG collection?). Post-investment, a DAO can often support portfolio companies far better than lean VC fund manager teams, calling on its members for strategic introductions, a talent pipeline, promotion on social media, and as potential customers.
Implementing venture DAOs, however, is often complicated. They run into issues of how to stay legally compliant with securities laws and ensure members fairly receive magic internet money for their investments and efforts.
The first generation of Venture DAOs, such as Meta Cartel Ventures and the LAO, had a relatively simple structure. These OG degens collectively managed a treasury, and all DAO members voted on all investment decisions. While this model has shown promise, it has typically required its members to stay under 99 members to avoid securities law infractions and has had a difficult time adding additional value beyond its broad rolodex.
To better understand DAO structuring models that help avoid these issues, we’ve outlined three of the most promising types of second-generation venture DAO structures below, each with its own tradeoffs:
DAO + Fund Model
The DAO establishes an external sister venture capital fund, which allows the DAO itself to have hundreds or even thousands of members. The role of the Fund is to raise external financing through Limited Partners, ensure it is legally compliant, execute contracts, and make investment decisions. DAO members are tapped to support the fund by referring deals, supporting due diligence, and providing networks to portfolio companies.
How the money works: Similar to a traditional VC fund, the Fund charges a management fee (often 2-3%) and then gifts the DAO a large portion of the carry (sometimes as much as 100%). General Partners in the fund benefit from Fund performance through their membership in the DAO. Individual DAO members who support the Fund's operations are compensated for their efforts.
Decision making: To ensure decisions are swift and made by individuals that have time to dig into each deal, all investment decisions by the Fund are made by General Partners. DAO members, in turn, vote on the use of funds in the DAO’s treasury.
No regulatory limit on DAO membership
All DAO members are incentivized to support portfolio investments
Rapid decision making
Relatively simple contracting and legal structures
Ability to raise external funds through GPs
DAO members are not required to be Qualified Investors
Expensive and slow to start as it is dependent on raising external capital
The tag-along issue: DAO members need not participate to benefit from the fund’s efforts
Many years for carrying to be realized, but this is mitigated if DAO members can sell their DAO membership/tokens that should track the portfolio's market value.
GPs may want additional upside for their investments
Example: OrangeDAO + Orange Fund. Orange DAO has founded Origami to help other DAOs launch with this model.
The Syndicate Model
In the Syndicate model, the main DAO spins up sub-DAOs for each investment. Members of the main DAO are given the opportunity to join these sub-DAOs and participate in each individual investment. Sub-DAOs are typically limited to 99 people. This keeps them categorized as ‘Investment Clubs,’ which do not have to comply with stricter securities laws. To help members determine whether to participate in each investment, the main DAO typically puts together a brief investment memo for each investment opportunity. Post-investment, each sub-DAO typically directly supports its respective venture.
How the money works: DAO members that opt-in to each investment contribute capital to their respective sub-DAO, executing each investment individually. Any returns from the investment are returned to the sub-DAO, and the main DAO may charge a fee for sourcing and diligence of the investment.
Easy to set up with platforms like Syndicate automating the process
Members are more active with their investments, with members opting into each investment
High time commitment from DAO members that must personally evaluate each investment
Requires members with deep pockets as members shell out for each investment
Requires members to be Qualified Investors for investments taking on equity
A Services DAO
While not technically a venture DAO, I consider this model Community as a Service. In this model, a DAO does not directly invest in any ventures but instead lends its talents and strength to other investors. Similar to the DAO + Fund model, a collective of DAO members with specific knowledge of various geographies, industries, and technical skills provide pre-investment and post-investment support to venture funds for a flat fee or equity stake. Services DAOs can be general or focus on a niche, such as Web3 legal services. This expands the skills and connections VC funds can call upon to support their portfolio. Unlike the DAO + Fund model, a Services DAO can work with multiple funds and fund managers.
How the money works: The DAO receives a flat fee or participation in the carrying of the fund for its services. The DAO, in turn, compensates individuals that supported the client fund, and keeps a portion of the fees for the community treasury.
Regulatory simplicity as the DAO does not directly hold equity in any venture.
No capital requirement to start
Diversified income if the DAO works with multiple funds
Limited up-side without direct investment
Example: LlamaDAO and Impact Collective
Which model is right for your community?
The structure for your DAO depends on your goals and the size of your bags. Groups not looking to raise capital or collectives already consulting in the Web3 space may consider starting a Services DAO. A collection of experienced angel investors with sizable individual bags and an interest to commit decent time to evaluate and support investments may consider the Syndicate Model. DAOs with ambitions to engage broad communities that can invest in setting up legal entities at the outset may look to the DAO + Fund Model.
These models are early and still being tested. Let’s experiment and share our learnings as we go. If we get it right, we will all own a Lambo one day! (we can take turns on who gets to sit in it)
This article was pulled together from research done in preparation to launch Africa3. If you want to join the effort, hop into our slack or tell us you are interested here.
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