Will Investment DAOs Decentralize Venture Capital?

A closer look at VC3, the first and only investment DAO made up of professional venture capitalists using the principles of decentralization to invest in and support Web3 startups

DAO 101

Decentralized Autonomous Organizations (DAOs) are a Web3 structure that allows communities, corporations, or any type of collective organization to be administered and governed without centralized leadership, thanks to blockchain technology.

With unprecedented, 30x+ growth in 2021, the DAO market exploded as the number of participants grew from 13,000 to 1.7 million people around the world, and has already grown to 3.8 million as of July 2022. Since their inception in 2016, DAOs have made headlines as they’ve attempted to purchase an original copy of the U.S. constitution, develop a global decentralized city, collect NFT art, and invest in metaverse real estate, fashion, and avatars.

With a variety of applications, the core concept of the DAO is fascinating, and it represents an area where technology trends such as artificial intelligence (AI), blockchain, and the internet of things (IoT) are intersecting to create new possibilities, especially when it comes to VC investing.

Enter VC3

Just last month, VC3, the first and only investment DAO of professional venture capitalists, emerged out of stealth with a $25M fund to invest in global Web3 startups. With over 150 voting members, all of whom are VCs and Kauffman Fellows, VC3 taps into an expansive network of expertise while relying on decentralized technology and processes to govern its investment pipeline, diligence, and portfolio support functions.

Says Jehan Chu, Kauffman Fellows Class 25 and Managing Partner of Kenetic Capital, who has been investing in the crypto space since 2013:

“The level of sophistication this group of VC investors brings to blockchain and crypto is phenomenal for the industry as a whole.”

He continued, “We’re able to pull in deal flow and best practices from more than one hundred firms to inform our investment process, and at the same time are rapidly educating some of the world’s best VCs on the nuances of Web3.”

How It Works

New members receive VC3 tokens and earn additional tokens for sharing deal flow, participating in due diligence, supporting the portfolio, serving on committees, and responding to project-based gig work in the form of token bounties. LPs also receive tokens and have the opportunity to participate directly in the DAO, including a unique token-based co-investment process. Alongside the capital investment, entrepreneurs are given VC3 tokens, which can be used to incentivize introductions, advice, and other support from the DAO’s network.

“Deals are sourced by VC3 members,” said Jules Miller, Kauffman Fellows Class 22, Partner at Mindset Ventures, and Founding Member of VC3. “Usually, members bring deals where they’ve already invested, so they’re highly vetted from the start, and the founders are excited to have participation by a DAO with 150+ VCs involved versus the small number of partners in a normal fund.”

When a member pitches a startup, the DAO votes on whether it would like to hear a pitch from the founders. If the DAO is interested after hearing a pitch, the VC3 Fund, managed by Mindset Ventures, completes due diligence, and ultimately the DAO votes on whether or not to invest in the company. To comply with regulations and provide an extra layer of fiduciary responsibility to LPs, the Fund does a final legal and risk assessment and a final vote on all investments, with participation from a six-member General Partner Advisory Council (GPAC) made up of Kauffman Fellows who are also members of the DAO.

Power of the Network

As an organization, we’re thrilled to see Kauffman Fellows coming together to pursue an innovative investment model on the newest frontier. Earlier this year, at both the Kauffman Fellows Module in Miami and Latin America Summit in Mexico City, our Blockchain Special Interest Group (SIG) explored what decentralized venture capital could look like, introduced VC3 to the KF Network, and explored how the democratization of venture capital can disrupt our industry.

“The venture capital landscape is changing, and we need to change with it. We’re building a new model for investing based on the principles of Web3 and decentralization, which allows us to do things that are not possible in a traditional fund,” said Miller.

VC3 invests globally and actively seeks out underrepresented founders, aligning with the Kauffman Fellows’ long-standing leadership on DEI in the venture industry. Says Ramphis Castro, Kauffman Fellows Class 19, General Partner at ScienceVest, and member of the VC3 governance committee:

“The tactical democratization and unbundling of venture capital enables more efficient allocation of resources to founders who wouldn’t otherwise be seen by the traditional VC landscape. This is the most exciting innovation in our industry since AngelList in 2010.”

Q&A with Jules Miller (KF Class 22), Founding Member of VC3, and Partner at Mindset Ventures

Congrats on launching VC3! For those not familiar, what is a DAO?

A DAO (Decentralized Autonomous Organization) is an online, member-owned community using collective decision-making, smart contracts to execute on these decisions, and token-based incentives to reward behavior.

How big is the market?

As of July 20, 2022 there are estimated to be 4,834 decentralized autonomous organizations, an increase from approximately 80 in 2020, or a +6000% growth over a period of two years.

The research platform DeepDAO estimates that DAOs currently have $10.2 Billion USD in assets under management in their treasuries.

When are you expected to make the first close? Who are your LPs?

Our first close is on July 29th, and we’ll do the final close by December. It’s a 24-month investment period, so this is intended to be fast, with 2–5 investments per month coming from our community. LPs are DAO members, family offices, crypto funds, crypto strategics, and corporate LPs.

Is there a precedent for VC3 DAO?

There are established investment DAOs such as the LAO, MetaCartel, Flamingo, Komorebi Collective. However, these more closely resemble crowdfunding or angel syndicates than professional VC funds. Members are expected to do their own due diligence on deals and rarely offer portfolio support. Other groups, such as OrangeDAO, an investment DAO for Y-Combinator alumni (with whom VC3 partners through their spinoff Origami), and Constellation DAO for TechStars Alumni, are the closest parallel and are run by experienced entrepreneurs and builders.

VC3 is the only DAO whose membership consists of full-time venture capitalists with the intention to build a new model of how professional VCs can leverage decentralization at scale.

Haven’t some individual funds done something similar?

Although several funds have launched some version of a DAO, to date, these are individual (centralized) venture capital funds inviting their existing communities to a Discord channel. While this is highly valuable in many ways, especially for portfolio support, these efforts are focused on benefitting one existing fund. And as far as we can tell, they do not yet seem to include the critical features that make Web3 and DAOs so powerful, such as having a token or decentralized governance (e.g., the community voting on important decisions). DAOs are still so new that every effort is a step in the right direction, but we’re quite a bit further ahead with VC3 than a lot of the other venture fund DAOs out there. Although we’ve been working on this since December 2021, we’ve been operating in stealth mode until we had these important Web3 functions launched and tested. We still have a lot of work to do to perfect the model, but so far, it’s been pretty incredible.

How is VC3 different?

What makes us very different from other venture DAO efforts is that VC3 DAO is made up of more than 150 venture capitalists at different funds, spanning 28 countries, and we’re all voting on decisions and earning tokens. We’ve issued our Genesis members tokens and are offering token bounties for work done, and we’re also giving our LPs and portfolio companies tokens. We use NFTs to permission different functions — Kauffman Fellows have a governance NFT, while LPs and portfolio companies will be issued their own unique NFTs by October for token-gated access to different parts of the DAO. Finally, we are formalizing an active co-investment process that will allow our member funds and syndicate fund partners to invest alongside us in the deals sourced by VC3.

This is a very different way to do venture, and one that is philosophically aligned with the core tenets of Web3 and decentralization.

VC3 invests globally and actively seeks out underrepresented founders, aligning with the Kauffman Fellows’ long-standing leadership on DEI in the venture industry. Why was this important?

As a group, Kauffman Fellows are intentional about improving the venture industry with a commitment to diversity, equity, and inclusion. Upon initiation, each of us signed the Kauffman Fellows Stewardship Pledge, and we actively incorporate these values into our own funds and the industry as a whole.

At VC3 DAO, we have adopted and expanded these values wholeheartedly. The DAO’s leadership team is made up of 42% women and 50% POC — 2–3x the VC industry’s global average and pretty much unheard of in the crypto industry. Our first four investments alongside funds like Andreessen Horowitz, Tribe Capital, and Bloomberg Beta have been into founders from widely diverse backgrounds in terms of gender, race, ethnicity, and geography. These are early signals that a decentralized investor base can produce high-quality diverse founders, as well as venture returns. One of our members is also launching an SPV for diverse LPs to participate in the fund at smaller check sizes, and we actively stack our pipeline with founders from every possible background. This is just part of who we are, and we feel that it’s especially important in the Web3 industry.

In addition to supporting diverse founders, VC3 member, Geoffrey See (KF Class 21) has said he believes DAOs have the potential to be a funding solution for founders in emerging markets. How do you see DAOs evening the playing field globally for entrepreneurs in Latin America, Africa, and other places?

Geoffrey is doing some great work at Poko making DAOs accessible in emerging markets. There is enormous potential here, and we continue to look at deals on all continents through our global network of VC3 members. Web3 innovation is happening everywhere, but many investors (especially those in the US) are limited to certain geographies. In contrast, DAOs are global by design. They are decentralized communities with members who bring their own unique networks, and in our case, that means global deal flow from the best investors around the world. For entrepreneurs, it means tapping into a global network of investors immediately, which is helpful as they grow and pursue follow-on funding.

VCs can not afford to only invest in their local 7x7 community anymore, and investment DAOs unlock the insular nature of traditional VC in a way that we think is very exciting.

VC3 makes mostly pre-seed, seed, and Series A investments, with an average check size of $250,000. Tell us about the current portfolio and the cadence for future investments.

VC3 has already invested in four deals, with two more in the final approval stages, and we expect the cadence after the first close of the Fund to be 2–5 deals per month. VC3 participated in the $25 million seed round of Co:Create, which is developing tools for building communities around non-fungible token collections. We also invested in Belo, a digital wallet with a cashback card out of Argentina, and DAO tooling company Origami, where we were actually their first customer. Our latest investment (not yet announced) is a Layer 1 protocol enabling financial derivatives on the Cosmos ecosystem, and is actually founded by another Kauffman Fellow!

How much of your time is going into this versus your “day jobs”?

Elected committee chairs commit to 5–10 hours per week during the 6-month season they are in that role. Members can contribute work ad hoc, similar to gig workers or freelancers, and be rewarded in token bounties. The beauty of a DAO is that you can commit as much or as little to it as you want, and if we get the model right, members should be incentivized to participate in meaningful ways with the token rewards. We are also planning to experiment with more temporary but full-time roles, such as a rotating CEO each 6-month season, which gives our members a defined time to be seconded into the DAO in a committed leadership role.

These are things that wouldn’t work in normal VC funds or even normal companies, but are very much aligned with the world of Web3.

Once VC3 makes investments, it draws upon its broader network in order to provide support to founders. Can you share a specific example of how the network has jumped in to support the current portfolio?

The idea is, ‘Can we tap into the hive mind of hundreds of VCs and be smarter and more efficient than a traditional fund, while also accessing resources and expertise that we wouldn’t have individually?’ And it’s already proving out that way.

It’s similar to how VC firms’ platform teams work to support portfolio companies, but in the case of VC3, our startups can tap into a much deeper pool of resources, which we will continue to build out through our ecosystem partnerships.

Founders can post bounties to request expertise and support — and the investors, LPs, and other community members who respond can earn more tokens. We’re just getting started, but we're already seeing initial use cases in the things VCs say they help with, such as hiring, sales intros, and follow-on funding. There are also some out-of-the-box ideas we’ve been discussing and will start experimenting with as we grow.

You’ve said the DAO’s structure offers LPs greater transparency into the fund’s activities than they typically would receive from VC firms. While this is a big advantage, have there been any major objections from prospective LPs?

No objections — other than it’s really a first-time fund. We confirm 80% of the LPs we speak to, most of whom are already interested in crypto and DAOs. More than anything, we’re vetting the LPs as well. This isn’t a typical fund where we may only interact with our LPs a couple of times a year.

We are adding LPs directly to our DAO community, so we only want to include people and organizations who get the vision and are ready to (and excited to!) roll up their sleeves. Web3 requires participation, and we expect that from everyone involved in our ecosystem.

On the topic of transparency, how do you hope to eventually influence how the industry operates at large?

We are unbundling and decentralizing the core functions of VC — deal flow, diligence, and portfolio support. This is a Web3 native way to invest in Web3 companies, which addresses the current philosophical misalignment of Web3 companies promoting decentralization but taking centralized capital from traditional VC funds.

If we believe in the power of blockchain to flatten and disrupt other industries, we must apply the same thinking to our own industry.

To learn more about VC3, check out recent press:

• Decentralized Venture Capital, an interview with Jules Miller, VC3 DAO via Web3 Roundup
• More than 150 VCs are joining forces in a DAO launched by Mindset Ventures to win deals in Web3 startups via Business Insider
• How Blockchain Is Reinventing Entrepreneurship For Developing Countries via Forbes
• VC3 DAO Comes Out of Stealth via Yahoo Finance
• 5 investors explain why Latin America is poised to weather the crypto winter via TechCrunch
• Are ‘decentralized autonomous organizations’ the business structures of the future via World Economic Forum

DAO Partner & Leadership

Mindset Ventures is the initial fund partner of VC3, making investments on behalf of the DAO. Mindset is an international venture capital firm investing in early-stage B2B software startups in the US and Israel. Founded in 2016 in Sao Paulo, Brazil, with a majority LatinX team, the fund also helps portfolio companies expand internationally, especially to Latin America. Mindset has invested in more than 60 startups, including Brex, Turing, Payjoy, Future Family, Priori, and Rain.

The fund's investment committee is led by a six-member General Partner Advisory Council (GPAC), who are all Kauffman Fellows. The DAO is led by four committees, with three elected committee chairs per six-month Season.

General Partner Advisory Council (GPAC)

Jehan Chu — Kenetic — KF Class 24 — Hong Kong

Caroline Lewis — Rogue Women’s Fund — KF Class 24 — New York, NY, USA

Ben Metcalfe — Monochrome Capital — KF Class 23 — San Francisco, CA, US

Jules Miller — Mindset Ventures — KF Class 22 — Nashville, TN, USA

Dave Rosenberg — NetSuite — KF Class 22 — New York, NY, USA

Beau Seil — Patamar Capital — KF Class 22 — Singapore

Governance Committee Leadership

Ramphis Castro — ScienceVest — KF Class 19 — New York, NY, US

Claire England — Portfolia — KF Class 21 — Austin, TX, US

Jules Miller — Mindset Ventures — KF Class 22 — Nashville, TN, US

Programs Committee Leadership

Becker Chase — Bosware — KF Class 21 — New York, NY, US

Ik Kanu — Atlantica Ventures — KF Class 23 — Lagos, Nigeria

Marcos Polanco — Bellwether — KF Class19 — San Francisco, CA, US

Tokens & Treasury Committee Leadership

Katelyn Donnelly — Avalanche VC — KF Class 21 — New York, NY, US

Clint Korver — Ulu Ventures — KF Class 14 — San Francisco, CA, US

Toby Rush — Stealth Startup — KF Class 23 — Kansas City, KS, US

Startups / Investments Committee Leadership

Claire Diaz-Ortiz — Kleiner Perkins/Angel — KF Class 26 — Buenos Aires, Argentina

Raghu Madabushi — National Grid — KF Class 24 — San Francisco, CA, US

Shirley Schoenfeld — Yopto — KF Class 23 — Tel Aviv, Israel

Jehan Chu — Kenetic — KF Class 24 — Hong Kong

Caroline Lewis — Rogue Women’s Fund — KF Class 24 — New York, NY, USA

Ben Metcalfe — Monochrome Capital — KF Class 23 — San Francisco, CA, US

Jules Miller — Mindset Ventures — KF Class 22 — Nashville, TN, USA

Dave Rosenberg — NetSuite — KF Class 22 — New York, NY, USA

Beau Seil — Patamar Capital — KF Class 22 — Singapore

Network Partner

Kauffman Fellows is the world’s premier leadership and venture capital-focused program with the largest and most connected network of investors in the world. Since 1995, Kauffman Fellows has accelerated the development and success of venture capitalists around the globe, supporting Fellows to navigate every aspect of innovation investing, from deal flow to public markets.

VC3 is an independent initiative of the Kauffman Fellows alumni and is not directly affiliated with the Kauffman Fellows organization. While not involved in day-to-day operations of VC3, Kauffman Fellows will be a token-holding part of the VC3 ecosystem.

For ongoing information about VC3, please visit www.vc3dao.xyz, subscribe for updates, and follow along on Twitter (@vc3dao).