Reimagining venture capitalism within web3

Web2 bad, web3 good

I got green-pilled into the web3 and crypto space in a very ferocious way back in late 2021. The lack of ownership within so many centralized systems further cemented my disdain for centralized work.

I read everything there was to read, the DAOhaus How to DAO resource was super helpful in helping me understand the intricacies of decentralization, communal ownership, coordination and so much more. While this has shaped my mindset and values. I’ve recently realized I might have become a decentralized maxi in a capitalist world.

The myth of decentralization

Two spaces have argued for less influx of centralized entities were;

• Decentralized autonomous communities (which seemed like startups to me at that point)
• Venture Capital; In terms of ease of access to capital

Maybe this is me slipping into some form of “centralization is good” argument but there’s an element of truth in there. Having dedicated more than a year of my professional life to participating in decentralized organizations and building governance/operation mechanisms, I’ve learnt that sometimes, decentralization of work and decision is extremely costly, sometimes inefficient, and mostly torturous.

I’ve watched many great communities struggle to retain quality contributors, workgroups and guilds get attacked by bad actors due to a lack of concrete control, contributors struggle with taking ownership or contributing to the decision-making process and many DAOs which were previously decentralizing revert back to a centralized model of organizing in order to efficiently operate and remain profitable or at least pretend to be.

All of these have led me to the conclusion that pure decentralization might remain a myth within web3. What seems more sustainable is progressive decentralization.

Within Venture Capitalism;

This is really a no-brainer. There’s not much alignment between the ethos of capitalism and that of decentralization. Capitalism as a system is obsessed with private control and ownership, competition, and a for-profit outlook on life. Web3 on the other hand, exists for distributed control/ownership, collaboration, and playing positive-sum games. The struggle with truly propagating these ideals is that decentralization currently operates in a larger capitalist world and by extension, is consumed by it. It has to participate in the profit game to survive many of the irregularities it’s currently experiencing.

The influx of VCs into web3 can be better explained by the industries potential to grow and reach profitability at a more accelerated rate and on a wider margin. As a result, many VCs found it a lot more profitable to invest in. In fact, in the first nine of months 2022 alone, VCs had already invested $20 billion in crypto/web3 startups globally. If we zoom out a bit what this looks like is a moth being drawn to a flame.

This influx has also raised many concerns from critics like Jack Dorsey. In December 2021, the former Twitter founder put up a tweet arguing that VCs owned web3, not users. A notion I also agree with.

Capital is King

In a society where access to capital determines what gets invented and what ideas survive, it has become harder, as Jack stated to escape its incentives design. In the early crypto years, capital was provided by users and builders of blockchains like Bitcoin and Ethereum.

The idea was to have a distributed ledger and system of transacting without centralized control. For a long time, early adopters of this technology invested their time and money into making cryptocurrencies what they are today. So many contributed to its growth with zero incentive. But as time has passed, scaling these technology and class of currency has become inevitable. Especially if it wants to reach mass adoption. But mass adoption costs money.

This is the irony that exists between venture capital and the crypto industry. VCs have been known to provide startups with the freedom to take risks, experiment, and fail fast without that much financial consequence but when we examine how ownership is distributed among venture-funded startups, we see that primary investors such as LPs typically have a 50% ownership or more in invested companies. What this basically means is that individuals would typically own more than half of a startups valuation resulting in private ownership. With private ownership comes private control.

In summary, we seem to be building web3 with web2 funding mechanisms

Redesigning Venture funding within web3

But what if we redesigned our approach to venture funding in a way that truly embodied the values of decentralization? What if we built funding mechanisms that provide global access to funding, which would enable startups to receive funding from a global pool of investors?

I don’t have the answers on how this could work and I’m short on word count with this article but this could help projects/startups access capital from investors who are interested in their specific niche or industry.

It could also boost transparency and accountability which means that investors can track the performance of their investments in real-time which will help to build trust between investors and startups, which is essential for long-term success.

Conclusion

As the web3 space continues to evolve, it is important to consider how to balance the need for capital with the values and principles of decentralization to create a more equitable and sustainable ecosystem.