Jules Miller: How 150 VCs created the VC3 DAO for decentralized investing
Venture capitalists often seek tech startups that promise disruption, but it’s not every day that you see VCs try to disrupt their own way of doing things.
That’s why the VC3 DAO is an interesting move to get VCs to collaborate on decentralized investing and show support for the Web3 movement. Jules Miller, a partner at Mindset Ventures, serves as a founding member of VC3 and head of the governance committee for the DAO (decentralized autonomous organization). The group has more than 150 venture capitalists and Kauffman Fellows, said Miller in an interview with me.
Miller believes that decentralization can bring both innovation and transparency to tech companies as well as tech investing. She got involved early as a believer in the blockchain, the decentralized and transparent digital ledger behind Bitcoin, Ethereum and many other cryptocurrencies. Business Insider recently featured her as one of the influential women working in VC and the crypto space.
VCs have been driven by tradition. But they have been disrupted in some ways by the onset of token sales and alternative fundraising that has arisen with Web3. The DAO is aimed at bringing transparency to the process of vetting and investing in startups.
The members all do their own due diligence, but they share their knowledge of each startup or sector to bring more sophisticated analysis to each decision. This is a way of democratizing VC investments and driving subjectivity and other biases out of the process, Miller believes. It’s also a way of schooling more VCs in the opportunities for Web3.
All of the members are either venture capital professionals or Kauffman Fellows, which is a VC leadership program with alumni representing more than 600 firms across six continents and $8.5 trillion in exits.
VC3 DAO members all start with an allocation of $VC3 tokens when they are onboarded, then earn additional tokens for sharing dealflow, participating in due diligence, supporting the portfolio and serving on committees. Entrepreneurs are given $VC3 tokens in addition to the fiat investment, allowing them to tap into the network by using their tokens as bounties to incentivize introductions, advice and other support. Limited partners are also given tokens and have the opportunity to participate directly in the DAO, including a unique token-based co-investment bidding process. In short, the DAO structure and its tokens reward people who bring value to the investing process.
Miller believes the VC landscape is changing and VCs have to change with it. VC3 is offering a new model that takes advantage of the principles of Web3, she said.
So far, 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 expects that plenty of DAO members will co-invest alongside VC3.
Here’s an edited transcript of our interview.
VentureBeat: Where did the idea for the VC3 DAO come from? How did you get involved?
Jules Miller: I think maybe the story is a non-traditional story. I’ve always been in the blockchain space, the crypto space, the innovation space. The non-traditional part is, I had a baby. I came back from maternity leave thinking, “I love the venture industry. I love the startup industry. But if I’m going to do something, it has to be very focused and very high-impact, something that’s really interesting. How do I push the boundaries of what we’re doing as an industry?”
I had originally looked into doing a crypto-specific fund. I love the web3 space. I don’t think you can be a partial investor in web3. You have to be fully committed. Otherwise you just are not in the flow of information. When we started looking into this, it became very clear that DAOs were an exciting and emerging part of the business. No one had really done an investment DAO in a way that was appropriate for professional venture capitalists. Meaning there are investment clubs. They feel like crowdfunding or angel groups. That’s great. There’s an interesting angle there. But as a professional venture capitalist, how do we do that in a way that can be scalable, that can have billions of dollars of AUM with multiple funds in a way that’s philosophically authentic to the web3 companies we’re investing in that promote decentralization? Otherwise, why would they take money from a centralized fund? We went down the DAO path and got to where we are.
It was very clear that it had to be–communities are important. I’m part of an interesting community called the Kauffman Fellows Network. I run a blockchain special interest group there. It’s a group of VCs around the world. That was a community that was also interested in DAOs. It made sense that this is what we would do. It’s more complicated than I expected in the beginning, and a lot more operationally difficult and maybe new, but we started down the path and we’re learning every day. It’s become something very exciting.
VentureBeat: How does it work? How is it different from starting something traditional?
Miller: It’s a community. We have 150, almost 160 now, venture capitalists from 28 countries around the world who, instead of decisions being made in a very opaque way by a small number of partners–we’re sourcing deals, doing diligence on the deals, voting on the deals, and then supporting the portfolio companies through a network, versus two or three partners. That’s fundamentally the difference. We’re also learning every time from all of those people. When we debate an investment after a pitch call, it’s not three partners debating. It’s 40 VCs debating. You also learn from each other and how people evaluate deals.
Maybe the more important part is the token piece of it. The incentive structure for the people who are participating in the DAO, and also for the entrepreneurs, is much more interesting when you have tokens. We encourage people to do things that are interesting, that are useful to the DAO, by giving them tokens. If they share a deal with us and we do that deal, then they earn tokens. If they support the due diligence process by giving references or doing market analysis, they earn tokens. If they support the portfolio companies they earn tokens. There’s a mechanism to incentivize people to do things that VCs say they do, but don’t often follow through on.
From the entrepreneur side, we give them tokens. If they need help, instead of saying, “Please help me because you’re my investor, it would be great if you could help me hire this person,” they can say, “Hey, here’s a bounty in tokens. We’ll put up 25,000 VC3 tokens if you help us hire someone.” There’s a real incentive structure there that doesn’t exist in traditional venture funds.
VentureBeat: How much money went into it? Is it also a raise in the sense that each member puts in some money and that becomes the pot?
Miller: No, it’s a bit different. When we went into the DAO space, it’s very–again, we tried to figure out the right mechanism to do this for professional VCs. For the existing all on chain DAOs, where you buy the token to buy in, there are limitations where you can’t do things we needed to do as a venture fund. For example, 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 OK 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 diligence, make their own decision, and then they can vote on the decision. But there’s no support from the DAO to do that.
The way we have structured it to align with what we thought was important, we have an on chain DAO. The DAO is a Cayman Foundation company. All of the VCs are members of the DAO. They do not have to buy into it. There’s no capital required to participate in the DAO. It’s just a vetted network. They have to be part of our community. It’s not open. We verify that everyone is part of the network. Then they can vote and earn tokens. The tokens have no value, but then we have a separate fund. The fund is what invests in the companies that the DAO has sourced. The fund has ultimate responsibility for doing the diligence and signing off the deal, doing the final vote on the deal. But it’s the signal that the DAO gives through all the activities the DAO does–that’s a very important signal for us as consideration for how we view the deal. That’s how it works currently. More than half of the members of the DAO are also LPs in the fund. There’s clearly alignment. But that’s not required.
VentureBeat: It feels like legally, then, the fund has to be separate from the DAO?
Miller: Right. We spent a lot of time and energy on that. We’re trying to be legally compliant and thoughtful about the regulatory landscape, which is very tricky in this environment. But for our community it was important. We don’t want anyone to lose their day job because we’re doing something illegal here. While there are still risks, we’ve tried to minimize risk as much as possible by doing things like this to make sure we have the right intention to be as compliant as possible, and making sure we respect the securities laws, for example.
VentureBeat: And it’s about $25 million? Where did it wind up?
Miller: Yes, $25 million. We’re doing our first close now. It’ll be at the end of the month, and it should be between $5 million and $10 million. The rest will close by the end of the year.
VentureBeat: Is there a sector focus for the fund?
Miller: It’s web3 broadly. Anything in the web3 space. We typically do early stage deals, although we don’t have to. The differentiator is really that we’re only doing deals that are sourced by our community. It’s almost always deals that they are also investing in. It’s basically co-investing with our members when they’re already investing in the deal. It’s a very vetted deal flow in the web3 space broadly.
VentureBeat: You get transparency out of this. What are some other benefits for doing it this way?
Miller: We get a completely, radically different incentive structure. Why would people behave in certain ways and do things that are helpful to both entrepreneurs and LPs in the community? It’s more philosophically aligned with web3. It’s decentralized. The last thing that’s very interesting, that we’re working on formalizing now–we will do an investment through the VC3 fund, based on the activities of the DAO, partially based on the activities of the DOA, but there’s also a lot of interest from our network in co-investing. A founder comes to VC3 and we write a check – our average check size is $250,000, a relatively small size – and then we usually have five or six members who are also interested in co-investing. We present those, introduce them to the founders, and then they can fill out their round with more than just VC3.
We have not launched that yet, because we’re working through the legal details, but the future holds something that looks like a token-based bidding process for filling out the round. If an investor wants an allocation, they can use their VC3 tokens to unlock that allocation. The founder can then decide who they want to be in the round, and then earn tokens based on what the token bid is. That’s the future. We’re working on what that looks like, doing it in the right way that’s compliant. But we think those types of things are just not possible with a traditional fund.
VentureBeat: This is probably getting away from the DAO itself, but I wonder how some of the predictions people had about venture capital getting disrupted by web3 and token sales and things like that–how has that turned out, if you look at the big picture? People were predicting that venture capital would be completely disrupted, but it doesn’t feel like it’s turned out that way.
Miller: No, it doesn’t. This is exactly why we’re doing what we’re doing. We’re not trying to replace VC. We’re trying to evolve VC using the principles of web3. I don’t think VC is going anywhere. The top funds are doing extremely well. The funds in danger are actually the smaller to mid-tier funds that are more generalist. You’re seeing a differentiation between the funds in the venture space. More than web3, the private equity funds getting into venture really disrupted the space in a meaningful way. That’s been causing turmoil. I don’t know what the result of that will be, because they’ve pulled out at this point. But the venture space–we’re in the innovation economy. We have to evolve with the industry.
If we’re investing in web3, if we believe that decentralization is the basis of the next internet, then we have to believe that there is some adaptation that we can make ourselves. The reason it hasn’t necessarily panned out to disrupt VC is because it hasn’t been a better option. It’s been a complicated option, a more difficult option, a more expensive option, a more legally complicated option. When you present a better option than VC, which is what we’re trying to do here, or a better version of VC, then entrepreneurs will go there. But if it’s not a better version they’re not going to do it. I don’t think that better version has appeared, but that’s what we’re trying to build.
VentureBeat: There was some behavior that people really didn’t like that venture capitalists also engaged in. Things like flipping tokens. They’d get tokens at an early price and then dump them once it goes up. It was “so long” after that. Have you had to deal with the reaction to that kind of thing?
Miller: It was a limited number of funds, but they were doing it at high volume in a lot of deals. It’s the nature of the beginning 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 isn’t fully mature, people will do that. You saw that happen. People made a lot of money doing that. They also destroyed companies. All of this is part of the natural cycle of things. Founders are smarter. They don’t want investors to buy tokens that way, because they know it doesn’t help them in the long term.
This is why being philosophically aligned with web3 and operating our business in the same way that web3 founders do, that truly focuses on being decentralized, living and breathing that ethos–we have a greater respect for the ways to do this in the right way that are more about long-term value. But it’s also just the nature of the venture industry. We’re responsible to our LPs to provide returns. If there’s an easy way to do that, people have taken it. It doesn’t mean it’s the right thing. These are the constant questions funds have to answer. Is a quick return or doubling down on the long-term support of the company more important? This is something every venture investor at some point has to grapple with. Different people have different perspectives.
VentureBeat: You mentioned the next internet. A lot of people associate that with the metaverse, but I notice you’ve been more focused on web3. Is there a distinction you see as far as what is the important sea change that you want to jump on?
Miller: The semantics of it are interesting. The originals in the space say “crypto.” For people who’ve been in the space for a long time it was always “crypto.” For me it was “enterprise blockchain.” That was my focus. Web3 is a newer term, but I think it’s intended to be a more encompassing term. Right now my understanding is that the metaverse is under the banner of web3. It’s a piece of the web3 ecosystem. Web3 is kind of the broader category that has been created to encompass all of this stuff that’s the next way we engage on the internet that is more about aligning incentives, about being in a community, about individual ownership, about individual compensation for valuable behaviors that we’re contributing, rather than having a company benefit from its users. To me, web3 is the broader, all-encompassing category. Everyone defines it a bit differently. But it’s generally that. What is the next version of the internet? And then the metaverse would fall under that.
VentureBeat: I guess I think of blockchain and web3 as a kind of onramp for the metaverse. They could eventually lead to something much bigger. But in the meantime it was more focused on things that were in the bailiwick of startups. It sounds like the metaverse is going to be built by giant companies. But I do wonder, because of the reaction to NFTs in games and the crash in pricing right now, whether people are starting to question whether this is an onramp or a detour. How do you see the path forward around some of these obstacles that are starting to emerge?
Miller: This is all a very natural part of the cycle of innovation. Early adopters are excited. Then there’s a backlash. We figure out what works and doesn’t work. Some of the stuff people were trying, these were very clearly ways to make money that weren’t authentically adding value to gamers, for example. What you see now is, people love gaming. There’s always a token economy in games in some way. There’s points or skins or things you can earn that have value. The only thing NFTs do in a game is give you the ownership rights to those things. It’s a benefit to the user. But they can be misappropriated. They can be used in ways that feel scammy, that feel like you’re trying to squeeze money out of me, that don’t feel like they add to the experience in a game.
We will still definitely see NFTs in games, but they have to be very focused on things that are proving the authenticity of ownership of certain things in games that are important to gamers. If they don’t do that, then there’s no place for them in the game. The backlash you see, we’ve gone overboard. We’re doing things that are not coming from the user perspective, that are valuable to the user. We’re doing things that feel scammy, that feel like you’re trying to make money. But if you have things in a game, like a skin that you can trade, and you can prove who owns them with an NFT, then those are things that games will find valuable. They will accept them eventually. But it has to be authentic. It has to be valuable to the users. There was just too much that wasn’t providing that value.
VentureBeat: How does the DAO come to a better path, then, as you weave through these minefields?
Miller: It’s the hive mind of several hundred investors from all different backgrounds that are discussing and debating these things at a deep level. By nature we are very argumentative. We have to prove that we like something and really poke holes in the argument. When you have people from 20 different countries with all sorts of backgrounds and experience discussing a deal and figuring out if this is a good deal that we are excited about or not, it at least adds some sophistication to the conversation and the argument. We all get smarter as a result.
We’ve been doing several deals in the DeFi space, for example. DeFi can get complicated, especially if you’re not in it every day. What we find is that the more deals we do, the smarter we get. This is pretty basic. The more you see things in the space, the more you see how the companies play out. One company approaches something differently from another company. You get smarter every time. In web3 you have to be in the flow of information. It changes so fast. You have to have investors who are very sophisticated, who live and breathe in that world. Not all investors are.
Part of what we do in the DAO is bring in very sophisticated investors who may or may not be doing web3 full time in their day jobs, but they bring their very sophisticated investor hat every time we look at a deal. By pushing and pulling in the conversation, we all get smarter as a result. We all do better deals, both in our own funds and through the DAO.
VentureBeat: Do you need a $4.5 billion fund like a16z to make an impact here?
Miller: No. We will never do that. However, the plan is to add multiple funds to the ecosystem. I talked a bit about our co-investment. This is where we see the opportunity. A $25 million fund is a small fund. We may raise a slightly larger one, or even a much larger one, the next time around. But we’ll never raise a billion dollars. However, we may have more than a billion under management, or at least affiliate with the DAO, by having syndicate fund partners, or having five or six different funds, or 20 different funds as part of the DAO ecosystem, so that everyone can make their own decisions, but we’re collaborating on due diligence. We’re contributing deal flow to each other. People can make their own decisions, but it’s done as a community versus individual venture funds that are very centralized and making decisions with a very small number of people.
VentureBeat: What do you think of your timing here, since we’re in the middle of this “crypto winter”?
Miller: The timing is great from the company side. We’re still extremely excited about the companies that are being built. They’re very serious entrepreneurs who are very intentional about weathering the storm and what they’re building right now. The voyeurs, the people who were here for the wrong reasons, are gone. That’s important.
I will say, it’s much harder to raise capital as a fund right now, especially because a lot of the crypto investors who are part of the LP ecosystem are weathering a bit of their own personal storm at the moment. But that doesn’t matter. That’s why we’re raising a small fund right now. We’re having no problem. But I do think that this is where some really interesting companies are built. We’re excited about it.
As investors–this is a bit different, our investment DAO versus some of the other ones. We’re full time professional venture capitalists. We’re not going to leave the venture capital industry. We’re not going to stop investing in startups. This is what we do every day. We’re here for the long term. It’s just about adapting to the market conditions, which means adapting to the type of deals we’re doing. We’re doing fewer token deals. We’re doing more equity investments right now. That may change as market conditions change. We’re not doing as many seed stage companies. We’re doing a few seed stage companies, but we’re also doing more mature companies. This is the beautiful thing about our community. We’re not going anywhere. We’re just learning and adapting depending on market conditions. We’re excited by what we see so far.
VentureBeat: And the crazy valuations are coming down, too. That has to be beneficial.
Miller: They’re coming down. They’re also–I think the important thing, what I thought was a real problem in the web3 space generally, is we were seeing deals that wouldn’t give us diligence information. That’s very irresponsible, to do deals where we can’t check a cap table, a financial model, or any references on the founders because they’re just not sharing that information. The valuations are coming down, which is great. There are still some companies raising at very high valuations, but they have reasons for that. But I think the more important thing for us as professional VCs is we now are able to have a real conversation with founders.
In the bubble, or whatever you want to call it, the enthusiasm of six or 12 months ago, there were investors that would get shut out of a deal because they asked a question about the finances, or about something that was a potential flag. The founders would say, “Oh, you’re too difficult. We’re not going to answer that, and you can’t participate in this round.” That, to me, is a really bad thing for the market. It means we’re not doing things that are fiduciarily responsible for our LPs, minimizing the risk to the degree we can by making sure that things founders say are true. The purpose of due diligence is to verify information. If we’re not able to do that, then we’re not being responsible investors. To me, that’s the best thing about these conditions. There’s more willingness to share information and go through a diligence process. That’s natural and normal. It’s productive and healthy.
Of course, web3 companies tend to raise not from one investor. They do things that look more like party rounds. That also becomes a bit cumbersome if you’re doing a lot of due diligence with many different funds. That’s part of why our model works. We can have one due diligence process that’s available and leveraged by several different funds.
VentureBeat: The Kauffman Fellows, are they all VCs, or do they come from other industries as well?
Miller: To participate in the Kauffman Fellows program, you have to be a full time professional VC. Some of the alumni–it’s a fellowship program, so sometimes people were in the fellowship program when they were VCs and have then gone on to start companies. We’ve now invested in two companies through VC3 where our friends from the Kauffman Fellows network are founders. They were VCs and now they’ve gone back to the startup side. But these are all people who at some point, whether now or in the recent past, were full time professional venture investors. I don’t know the numbers, but it’s still probably 90-plus percent that are full time professional VCs.
VentureBeat: You’re a representative voice here, but I do wonder, does anybody actually lead the DAO?
Miller: We are not fully decentralized. The way the DAO operates is through committees. We have four committees, each of which has three elected representatives. That changes every six-month season. In DAO nomenclature, every six months is a new season. We have elections, and the people leading those four committees are generally those who drive the work.
We try to focus on decentralizing the things that are important, which are the unbundling of the things venture capitalists do. Deal flow, diligence, and portfolio support are the things we’re very focused on making sure are decentralized. The operations of the DAO are a little more centralized than maybe they will be in the future, because things need to work. Right now DAOs are a bit chaotic. We do need some organization that works and is driven. Right now I’m doing a lot of work. That will scale back as the next committee–I run the governance committee. I’m doing a lot of work now. That will then rotate to someone else, and also scale back as we become more decentralized and do more autonomous things. At the beginning DAOs have a very hard time being fully decentralized, because otherwise it just doesn’t operate. We’re trying to focus on the things that matter to be decentralized.
VentureBeat: What is the reason, philosophically, for supporting web3 and decentralization? What does the group collectively see as the reason to do all this?
Miller: It completely changes the balance of power. This is what’s so exciting about web3. Power is in the hands of the people who create value. You get value for contributing value, which is not what happens in Web 2.0. If you contributed value, someone else profited. The beautiful thing about web3 is, if I do something valuable, like watch an ad, I should be able to receive that value in return. It completely unlocks so many different business models, so many different ways for people to contribute. It rewards people for the things that are deserving of reward, which doesn’t always happen in Web 2.0.
VentureBeat: In gaming some people resist that idea because of this belief they have around intrinsic motivation and extrinsic rewards. They feel like fun has to be the motivation for people playing games. What would you say in response to that?
Miller: It depends on what you’re doing. Our Kauffman Fellows network–I told you that I run the blockchain special interest group with another guy named Jehan Chu, who runs a fund called Kenetic. He’s been investing in the space since 2013. We just brought in Jiho from Axie Infinity this morning and had him talk about exactly this question. He’s much smarter on this than I am, so I’ll just reiterate what he said. It’s a game. It has to be fun. It has to be engaging. But there is also power in the fact that people can earn for behavior. There’s a market, a secondary market for that if you’re willing to pay for it.
There are different ways that people approach it and different motivations. They don’t all have to be the same motivation. If you have multiple people participating in an ecosystem, and one is driven by the fact that he’s having fun playing the game, and another is driven by the fact that he can support his family if he’s delegated a skin that grants more experience points for doing something, and that leads to more money to put food on the table, those are both fine motivations. They’re both very deserving of being in the same ecosystem.
We’re still in the beginning days of this space. All we can do is continue to evolve the sector. This is also part of why we do this. You can’t invest in web3 unless you’re participating in web3. Bringing a bunch of investors who maybe didn’t use Discord before, we see the problems much more clearly. We’re using it and we see the pain points. There’s a lot of potential here, but it’s still a little clunky. Our job as investors is to invest in things that allow it to live up to the vision and to the potential. That’s why this is exciting.
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