By Joseph “Joey” Poareo, co-founder and developer at YashaDAO
Traditionally, entrepreneurs have tried getting their business and brand ball rolling with help from the government or through bootstrapping. Unfortunately, relying on the government to support their innovation is extremely inconvenient due to tight regulations, the long chain of command and dreadful bureaucracy. On the other hand, a bootstrapped startup is limited by several factors, the primary ones being a shoestring budget and a smaller network of high-net-worth individuals.
For several years now, despite their rocky beginnings in the late 1900s, venture capital firms have fueled innovation and unicorn startups by relieving the limitations that come from approaching the government for funds or trying to bootstrap a business. They did this by providing large capital in exchange for sizeable equity.
Nevertheless, VCs come with their own share of challenges that Decentralized Autonomous Organizations (DAOs) may be able to solve.
Challenges that startups face from venture capitalists
One of the main problems that startup founders face from venture capitalists is a lack of trust in their vision because it is "too far out there." Many don’t want to provide the money for a startup because of fear that it would be used up in costs and not pay off. This is mostly the case for highly innovative startups that most VCs struggle to comprehend.
Another huge challenge that startups face because of venture capitalists is that they discourage them from taking risks. They often try to discourage the startups to do new things with an attitude that “if it ain’t broke, don’t fix it.” They want startups to play it safe because they want a predictable return on investment.
Usually, startups that get funded by venture capitalists have to give up majority ownership. This gives the investors a lot of power. They can use this power to influence how the company is run and what products it produces. It also gives venture capitalists access to the founders' checkbooks. This means they have to ask the investors before they can spend any money.
Last, but not least, VCs often do not completely understand the concept of emerging technologies. And since they are able to steer the company and pull strings, they might not be the best people to make decisions as they do not completely understand the vision or implications of their actions.
DAOs: Redefining the world of fundraising
Decentralized Autonomous Organizations (DAOs) are emerging as the next step in the evolution of fundraising for startups and to support innovators and inventors alike.
One of the biggest Unique Selling Propositions (USPs) of DAOs is the equitable distribution of opportunity. They help democratize governance by decentralizing authority.
As mentioned earlier, traditional VCs have little knowledge but great power to dictate where the project goes. Further, due to the heavy capital required to invest in startups, people with smaller net worth are often left out of the game even if they understand the vision, mission and plan of action better than the VCs themselves.
DAOs help bridge these gaps and more by pooling like minded people and helping connect innovators and inventors with investors of all kinds.
For example, let’s take the scientific community. Many brilliant scientists struggle a lot to get investors to realize the innovativeness of their inventions or get their proposals approved. Also, many brilliant young minds are discouraged from pursuing their passion and unleashing their true potential because of politics, bias and bureaucracy.
With initiatives like The Science Dao, these geniuses get to submit their proposals to a community that can not just understand them but also relate to them.
Adapt to DAOs or become outdated?
DAO fundraising in many ways is democratizing the VC space. While over $600 billion were invested in startups by venture capital firms in 2021 alone, the harsh reality is that the traditional VC space is shutting up more innovations than it is fueling.
Startup founders worldwide have been sharing concerns about how venture capital funding is posing tremendous pressure on them. Moreover, for years, retail investors have been deterred from entering the VC game because of its risk and huge capital requirements.
This is where blockchain and DAOs can come into play. The technology creates the possibility for millions of investors across the globe to pool their resources to fund startups. In this sense, the risk is diversified among all participants, and no single person takes the total hit. Further, DAO-funded startups could have a higher likelihood to succeed because the team members can get an idea of how the product or service would be perceived in the market much before launch.
For instance, since a DAO is governed by several individual governance-token holders, the response that a project gets from the DAO can be extrapolated to a larger market of a similar audience (demographically and psychographically).
As more people flock to DAOs and ditch traditional VCs, it is high time for conventional VC firms to embrace blockchain and pivot to becoming more democratic and less “shark-like.”
About the author:
Joseph “Joey” Poareo is a co-founder and developer at YashaDAO, a decentralized incubator accelerator fund that uses DAO governance to speed up crypto projects like Guzzler and The Science Dao. Joey has been involved in multiple companies and currently serves as Chairman Of The Board and Co founder for The Sachiko Group. Joey is currently the CEO of the Science DAO, a decentralized think tank in which inventors, creatives, and institutions can come together to foster growth and incubate emerging technology.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.