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Decentralized Autonomous Organizations, or DAOs, are the latest trend in crypto investing. DAOs are organized communities with rules enforced through blockchain technology. Experts say fundraising from DAOs can be fast and give crypto startups access to major investors. See more stories on the Insider business page.
When crypto startup Multis started fundraising, the team followed a typical Silicon Valley playbook: They took the Y Combinator program in 2019 and raised most of their seed funding from major VCs.
But then the startup, which creates crypto financial services for businesses, turned to decentralized autonomous organizations, or DAOs for funding. Co-founder Thibaut Sahaghian was shocked that they closed the round so quickly. This is because DAOs, after hearing a pitch, can make decisions in a matter of hours and wire the money soon after.
“You literally get $ 500,000 in two minutes,” Sahaghian said, adding that it can take up to 15 days to receive money from traditional VCs. He estimated that Multis had raised a third of its $ 3.7 million in funding from DAOs.
DAOs are the latest trend in crypto investing, and some believe there are reasons for VCs to panic. Imagine a fund without a general partner, replaced by hundreds of experts who vote on every investment.
DAO itself is a broad term, referring to organized communities with rules enforced through blockchain technology. DAOs have been around for years, but there is renewed interest as the crypto market explodes. So far in 2021, decentralized finance startups have secured nearly $ 11 billion in funding, according to data from PitchBook.
Now, some big venture capitalists have joined DAOs to invest millions in hot crypto companies. The MakerDAO, which has invested in Multis, is supported by Andreessen Horowitz. And the Komorebi Collective, a new DAO focused on female, non-binary crypto founders, has Kleiner Perkins and Dragonfly Capital among its members.
Aaron Wright, who helped launch a prominent DAO called The LAO, said most DAO members have been in crypto for years. So instead of adding a few general partners to their capitalization table, the founders get hundreds of experts.
DAOs vary in the way they are structured. For example, LAO has around 70 members and around $ 40 million worth of ether to invest, supporting around 60 startups last year, including the NFT SuperRare Marketplace. Founders typically present via a phone call which is recorded and distributed to the group. Members then vote on whether or not to invest.
The rules are intentionally flexible, with investment decisions being made by “rough consensus,” Wright said.
“Since there is no leader and there are very few bureaucratic processes like some venture capitalists, we can act very quickly,” he said.
The history of DAOs
This is not the first time that DAOs have been in fashion. In 2016, a crowdfunding project called The DAO was launched, raising more than $ 100 million to invest in startups. Wright described it as “one of the first great experiments on Ethereum”.
“It was a spectacular disaster,” he said.
A hacker exploited a loophole in the DAO code, siphoning $ 53 million from Ether. To recover the money, members of the crypto world sent the blockchain back to a pre-hack time. It was incredibly controversial (blockchains are generally immutable) and became a defining moment in crypto history.
But Wright thinks this time is different. The flaw lay in a few lines of DAO code, not the actual Ethereum technology. Wright also took legal steps to formalize LAO: each member is an accredited investor and is registered as a limited liability company. Members can remain anonymous to the group, but they must be approved to join.
Several crypto startup founders have said they may mostly raise DAOs in the next few rounds, including Multis co-founder Sahaghian. When asked if DAOs could pose an existential threat to traditional VCs, Sahaghian’s response was “hell yeah”.
“I mean,” he said. “Why shouldn’t they be right? “
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