Venture capitalists seek out tech businesses that promise disruption, but it's not every day that you see VCs try to alter their own ways of doing things.
Jules Miller, a partner at Mindset Ventures, serves as a founding member of VC3 and the head of the DAO (decentralized autonomous organization) which has more than 150 venture capitalists andKauffman Fellows.
Miller believes that decentralization can bring both innovation and transparency to tech firms as well as technology investing. She became an early proponent of the blockchain, the decentralized and transparent digital ledger that powers Bitcoin, Ethereum, and many other currencies. Business Insider recently ranked her as one of the most influential women working in the cryptocurrency space.
Tradition has driven VCs. However, they have been harmed in some ways by the introduction of token sales and alternative fundraising that has emerged with Web3. The DAO is aimed at bringing transparency to the process of vetting and investing in startups.
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Miller believes that all members do their own due diligence, but they share their knowledge of each startup or sector to further enhance their judgements. This is a way of democratizing VC investments and dispelling prejudices out of the process.
All of the members are either venture capitalists or Kauffman Fellows, which is a VC leadership program with alumni representing over 600 businesses across six continents and $8.5 trillion in exits.
When VC3 DAO members are onboarded, they earn additional tokens for sharing dealflow, supporting the portfolio, and serving on committees. Entrepreneurs receive $VC3 tokens in addition to the fiat investment, allowing them to tap into the network by using their tokens to encourage introductions, advice, and other support.
Miller believes that the VC landscape is changing, and that VCs must evolve with it. VC3 is offering a new approach that takes advantage of Web3's advantages, according to Miller.
The adjacent VC3 fund, managed by Mindset Ventures, has made three investments based on dozens of pitches. The inaugural fund will invest $25 million, but the fund anticipates that plenty of DAO members will co-invest alongside VC3.
Here is an edited transcript of our conversation.
Jules Miller: I think the story is a non-traditional story. Ive always been in the blockchain, the cryptocurrency, and the innovation space. The non-traditional part of my life is, I had a baby. I love the venture industry. I love the startup industry. But if I am going to do something, it must be very focused and very high-impact, something that is truly interesting.
I originally wanted to do a crypto-specific fund. I love the web3 space. I think you can be a partial investor in web3. There's an interesting aspect there. But how do we get there in a way that's philosophically authentic to the web3 companies that were investing in?
It was very clear that communities are important. I am a member of a wonderful network called the Kauffman Fellows Network. It's a worldwide community that is interested in blockchain technology. We're learning every day.
Miller: It's a community. We've got 150, maybe 160, venture capitalists from 28 countries around the world who, instead of making decisions in a very opaque manner by a small number of partners, were also sourcing proposals, voting on the proposals, and then supporting the portfolio companies via a network, every time. You also learn from each other about how people evaluate transactions.
The most important aspect of the deal is the token part. It's much simpler to have tokens when you have one. If people submit a proposal to us and we do it, then they earn tokens. If they support the portfolio companies, they earn tokens.
We offer tokens to entrepreneurs if they need help. Instead of saying, Please help me, because you are my investor, it would be great if you could help me hire this person. I will give you 25,000 VC3 tokens if you help us hire someone. This is a true incentive structure that does not exist in traditional venture funds.
Miller: No, it's not that different. When we went into the DAO space, it's verygain, we tried to find the correct mechanism to do this for professional VCs. We do full scale due diligence. We write a deal memo. We do full due diligence. If we were all on chain, that would not be acceptable from a compliance standpoint, because it would be considered giving investment advice to the members. If we do something through Syndicate, for example, every individual has to do their own research and
The way we have structured it to fit into what we thought was important is we have an on chain DAO. The DAO is a Cayman Foundation business. All of the VCs are members of the DAO. They must be part of our community. Its not open. It's just a vetted network. Everyone has to participate in the DAO. The fund has ultimate responsibility for doing the diligence and signing the deal, and also for the final vote on the deal. That's how it works currently.
Miller: That's correct. We spent a lot of time and effort on it. We're trying to be legally compliant and thoughtful about the regulatory landscape, which is very difficult in this situation. However, for our community, we wanted everyone to lose their day job because they were doing something illegal here. By doing things like this, we've attempted to minimize risk as much as possible.
Miller: Yes, $25 million. We're on the first close right now. It'll be at the end of the month, and it'll be between $5 and $10 million. The rest will finish by the end of the year.
Miller: It's web3 broadly. Anything in the web3 space. We typically do early stage agreements, although we dont have to. The advantage is that we're usually doing deals that are sourced by our community. It's almost always deals that they're also investing in. It's basically co-investing with our members when they're already investing in the deal.
Miller: This is a completely different incentive structure. Why would people behave in certain ways and do things that are beneficial to both entrepreneurs and LPs in the community? We'll do a co-investing round through the VC3 fund, based on the activities of the DAO and partly on the activities of the DOA, but we also have a lot of interest from our network in co-investing.
We are still working on the legal details, but the future holds a token-based bidding process for filling out the round. The founder may then earn tokens based on what the token bid is. That's the future. We're working on what it will look like in the future, doing it in a way that's compliant.
Miller: No, it does not. This is why we were doing what we were doing. Were not trying to replace VC. Were trying to develop web3. The top funds are doing very well. The funds in danger are actually the smaller to mid-tier funds that are more generalist. Thats been causing havoc. But the venture space must evolve with the industry.
If we believe that decentralization is the foundation of the next internet, then we must believe that there is some adaptation we can do ourselves. It hasnt been a more costly option, a more legal option. Entrepreneurs will go wherever if you present a better alternative than VC, which is what we are attempting to achieve.
Miller: It was a limited number of funds, but they were doing it at a high rate in a lot of transactions. Its the nature of the starting of an industry. If there's an inefficiency in the market or a way to capitalize on a way of making money when the infrastructure isnt fully mature, people will do that. It's part of the natural cycle of things. Founders are smarter. They know it wont help them in the long run.
This is why, being philosophically aligned with web3 and operating our business in a manner that web3 founders do, that truly focuses on being decentralized and living and breathing that ethos, we have a greater respect for the different approaches to doing this in the appropriate way. It does not mean it is the correct thing. These are the constant questions that funds have to answer.
Miller: The terms used in the original space are interesting. For me, it was enterprise blockchain. That was my focus. Web3 is a newer term that I believe is intended to be a more comprehensive term. Its a piece of the web3 ecosystem.Its a piece of the web3 ecosystem.
Miller: This is all part of the evolution of technology. Then there is a backlash. We try to figure out what works and doesnt work. These were clearly ways to make money that werent truly enhancing the experience for gamers, for example. NFTs aren't exactly powerful, they can be used in ways that feel deceiving or deceiving.
NFTs will still be used in games, but they must be extremely focused on things that are important to gamers, such as things that are not relevant to the game. Were doing things that aren't user-friendly, that aren't paying attention to the user. Were doing things that sound scammy, that feel like you're trying to make money. But if you have items in a game, like a skin that you can trade, then those are things that games will appreciate.
Miller: It's the hive mind of several hundred investors from all walks of life that are debating these things at an extreme depth. We have to demonstrate that we like something and really poke holes in the argument. It at least adds some sophistication to the conversation and the argument.
For example, weve been doing several deals in the DeFi space. DeFi can be a complicated system, especially if you aren't using it every day. This is pretty basic. The more you see things in the space, the more you notice how the companies play out. You become smarter every time. In web3, you have to be in the flow of information. It's so fast. You have to have investors who are extremely knowledgeable.
Part of what we do in the DAO is bring in very smart investors who may or may not be doing web3 full time in their day jobs, but they wear their very sophisticated investor hat every time we look at a transaction. We all get smarter as a result, both in our own funds and through the DAO.
Miller: No. We will never acquire any more funds into the ecosystem. This is where we see the opportunity. We may have more than a billion under management, or at least affiliate with the DAO ecosystem, but we were also collaborating on due diligence. People can make their own decisions, but this is done as a community.
Miller: The timing is excellent on the company side. We're still very excited about the businesses that are being constructed. They're very serious entrepreneurs who are very meticulous about weathering the storm and what they're building right now. The voyeurs, the people who were there for the wrong reasons, are gone. That's important.
I will say that right now it's much harder to raise capital as a fund, especially because a lot of the crypto investors who are part of the LP ecosystem are dealing with a bit of their own personal hardship. Were having no problem. But I do think that this is where some really interesting businesses are constructed. Were excited about it.
Were not doing as many seed stage companies. Were also doing more mature businesses. This is the beauty of our community. Were not going anywhere. Were just learning and adapting depending on market conditions.
Miller: The valuations are falling, and theyre also increasing. What I thought was a real issue in the web3 space generally, was we were seeing deals that wouldnt provide us diligence data. It's very irresponsible, and it's very unfortunate to do deals where we can't see the founders' profiles because they're just not sharing that information.
There were investors who would be shut out of a conversation because they asked a question about the finances, or about a possibility. Were not able to verify information, then were not being responsible investors. Thats normal and normal.
Web3 companies tend to raise not from one investor. They do things that look more like party rounds. Thats why our model works. We can have one due diligence process that is accessible and leveraged by many different funds.
Miller: To participate in the Kauffman Fellows program, you must be a full-time professional venture capitalist. Some of the graduates went on to start businesses while they were VCs. They have all since gone back to the startup side. I am not sure how many of them are, but they're likely to make up the majority.
Miller: We are not completely decentralized. The DAO operates through committees. We have four committees, each of which has three elected representatives. That change every six-month season in DAO nomenclature. We have elections, and the people who lead those four committees are generally those who drive the work.
We're trying to focus on the things that are important, which are the unbundling of the things venture capitalists do. These are the things we're very keen on ensuring are decentralized. Right now, I'm doing a lot of work. That will then move to someone else, and also scale back as we become more decentralized and autonomous.
Miller: It changes everything about power. This is what makes web3 so exciting. If you contribute value, someone else benefits. That is not what happens in Web 2.0. So, if I do something worthwhile, like watch an ad, I should be rewarded for it.
Miller: It depends on what you're doing. Our Kauffman Fellows networkI told you that I run the blockchain special interest group with another guy named Jehan Chu, who runs a fund called Kenetic. He has been investing in the space since 2013, so I'll just repeat what he said. It's a game. It's a game. It's a game. It's a secondary market if you're willing to pay for it.
People have different approaches to problem solving and different motivations. They do not have to all be the same motivation. If you have multiple people participating in an ecosystem, and one is motivated by the fact that hes having fun doing the game, and another is motivated by the fact that he can help his family if hes given more experience points for doing something, and that leads to more food on the table, those are excellent motivations.
Were wet in the early days of this space? This is also why we do this. Bringing a bunch of investors who maybe didnt use Discord before, we see the difficulties much more clearly. Were using it and we see the pain points. Theres a lot of potential here, but its still a little clunky. Thats why this is exciting.