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Gate.io Blog Comparison of Venture Capitals (VCs and Investment DAOs)

Comparison of Venture Capitals (VCs and Investment DAOs)

09 August 09:19

[TL; DR]
🔷 Decentralized autonomous organizations (DAOs) raise funds from the sale of their native tokens.

🔷 The community members of DAOs make decisions on how the organization should use its funds.

🔷 Venture capital firms are centralized organizations which provide capital to business startups.

🔷 Venture capitalists should restructure their operations to provide value to web3 startups.

The advent of the blockchain has resulted in new business models such as decentralized autonomous organizations (DAOs). These blockchain based businesses have their own means of sourcing funds. For example, DAOs generate funds through their organized community members. They do not rely on the traditional model of raising funds which include obtaining loans from financial institutions or sourcing funds from venture capitals. In this article, we will compare venture capitals and DAOs work.

What are decentralized autonomous organizations (DAOs?)

A decentralized autonomous organization is an entity structure, controlled by smart contracts where community members decide on how the organization functions. DAOs can run for many years without human assistance since they are controlled by smart contracts.

Basically, DAO members interact with each other in accordance with a set of rules encoded in the smart contract. In most cases, anyone in the world can become a member of a DAO as long as he/she meets the requirements. A key requirement to become a member is to own its native token. Community members make decisions on how to use the funds through voting.

Investment DAOs

An investment DAO is a decentralized entity which generates a pool of funds from its members and invests it. To raise funds DAOs sell their native or governance tokens to its community members. In addition, the DAOs can sell their services to generate additional funds.

Token holders participate in decision making through a voting mechanism. Nevertheless, some DAOs give voting rights to members who have the required minimum number of tokens. After voting, the DAO will implement the decisions through smart contracts that execute the investment decisions.

In essence, the DAOs can invest in different fields such as GameFi, SocialFi, DeFi projects and NFTs.

Importance of DAOs

There are several reasons why DAOs are popular. For example, DAOs have great support from their communities. In most cases, the community members give feedback to the project founders through various social media platforms such Telegram Chats, Facebook and Twitter. Part of the advice relates to how the organization can improve products. Also, the community members can help in marketing the DAOs’ products.

DAOs improve operation efficiency as they do not depend on approval of big corporations (venture capitals). Instead, they get support from their members in a way that does not retard the progress of their projects. Moreover, they get funds from both small and large investors, indiscriminately. Thus, they do not only rely on the rich, popularly called sharks and whales.
DAOs increase innovation and entrepreneurship since they incorporate the ideas of many people in their projects. In fact, individuals with their own great business ideas can get funding through decentralized organizations. That is the reason why we find many young people with brilliant ideas prospering in the blockchain sector. Take, for example, how Vitalik Buterin has become successful, owning a multi-billion project at a tender age.

Venture capitals

An alternative business funding model is venture capital (VC). Venture capital refers to the financial resources which large investment firms give to start-ups to fund their projects. Usually, startups with a low reputation and proven record get funding from venture capitals.

Unfortunately, they find it difficult to get capital from traditional financial lending institutions such as banks. For venture capital firms, this is a very risky investment as some of the startups may fail to generate profit. The venture capitalists provide capital during the various phases of the project. In addition, they provide advice to the project they invest in. In return for the capital they provide to emerging businesses, the venture capitalists get high returns and shares in the startups.

Investment DAOs vs.Venture capital

Decentralized autonomous organizations now compete with venture capital firms in providing financial resources to emerging projects. Mostly, though, DAOs focus on blockchain-based projects while venture capitalists provide funds to businesses in the traditional sector. However, recently some venture capitalists have begun providing funds to blockchain based projects.

In some cases, venture capital firms have turned themselves into DAOs to capitalize on many opportunities in that sector. For example, Stakers Ventures is a venture capital firm that has turned into a DAO. This is because VC firms have noticed the potential the DAOs have in our current dynamic business environment. Moreover, the VCs should now justify the value they bring to the modern business environment. If they do not evolve according to the changing economic environment, they may get out of business in the future.

Due to their background, DAOs can only operate in the blockchain sector. This is because there are stringent requirements for them to operate in Th tradinationa sector. That is why only venture capital firms invest in the traditional sector. The venture capitals currently operating in the decentralized sector have limited knowledge and experience required to excel. Therefore, venture capital firms will need to adapt to the requirements of the blockchain sector.

On the other hand, venture capitalists offer vast support services to the projects they work with. However, DAOs depend on the advice of their community members and do not offer specialized support service. Therefore, venture capitals have an advantage over DAOs in terms of support it offers to the traditional sector.

Can DAOs replace venture capitals?

Currently, DAOs are offering most of the services which venture capital firms provide. For example, they can source business deals; they get information from their communities and have much knowledge about the technology and the evolving business environment. As such they have the capacity to replace venture capitals. Moreover, people like to work in democratic structures rather than centralized ones.

A hybrid system
Despite the possibility of DAOs replacing venture capitalists, the greatest possibility is a hybrid system; where investment focused organizations provide capital to both the decentralized sector and the traditional one. This is because DAO operations are behind venture capitals in terms of efficiency and functional capabilities. Therefore, a hybrid system will combine the community based aspect of DAOs and the huge financial resources and operational efficiency of capital ventures. Thus, the centralized investors will work alongside the democratic investment syndicates, thereby providing best services and resources


In short, an investment DAO is a decentralized organization which raises funds from its community members and invests it. Usually, DAOs sell their own cryptocurrencies to raise the funds or capital. On the other side, venture capital is a pooled fund used for investing in startups with high potential. Apart from the capital they provide to businesses, venture capitalists provide support services to the startups. Some analysts have concluded that in the future investment DAOs will replace venture capitals. However, the greatest possibility is the creation of a hybrid system where decentralized and democratized structures work along centralized investors.

Author: Mashell C., Gate.io Researcher
This article represents only the views of the researcher and does not constitute any investment suggestions.
Gate.io reserves all rights to this article. Reposting of the article will be permitted provided Gate.io is referenced. In all cases, legal action will be taken due to copyright infringement.

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