Delphi Digital co-founder: JACK is wrong, Web3 VCs will become more like DAOs
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Delphi Digital co-founder: JACK is wrong, Web3 VCs will become more like DAOs
Jack views venture capital as the controlling entity of projects, but this depends on the venture capital and the specific investment structure used. In the best-case scenario, this space is ruled by meritocracy and entirely community-driven.
Navigating Web3 tides with focused insightsThis article is compiled from the latest Twitter thread by Tom Shaughnessy, co-founder of Delphi Digital, in response to BTC influencer Jack's claim that "web3 is centralized entities with different labels." He offers a rebuttal and shares his personal views on the development and challenges faced by Web3 VCs versus Web2 VCs. (Not investment advice)
1/ Web3 VC is fundamentally different from Web2 VC. The stakeholders in Web3 are also far better than those in Web2. Jack’s assertion that “web3 is centralized entities with different labels” is incorrect.
2/ IMO, Jack’s worldview is shaped by BTC as the ultimate cryptocurrency and the rigid structure of Web2 VC, which differs greatly from Web3 VC.
3/ I believe his perspective on VC is biased because he hasn’t actually spent time building or investing in DeFi/Web3 applications, given his allegiance to BTC—a network that is rigid and comes with high cultural and economic costs.
4/ In Web3, capital allocators and community members should be one and the same—there should be no dichotomy.
5/ Over time, venture funds that merely allocate capital will be phased out, as capital is cheap and founders are seeking stakeholders who are committed community members.
6/ Jack sees venture capitalists as controlling entities of projects, but this depends on the specific VC and investment structure used. At its best, this space is meritocratic and entirely community-driven.
7/ The survival of every project hinges on the community. If a project fails to listen to or adapt to its community (where community = users and token holders are one), usage and capital will drain away.
8/ In well-structured projects, VCs do not control the direction—the community does. A Web3 VC can submit a governance proposal, or a college student working in Mumbai can post their idea; both will be scrutinized and evaluated by the community.
9/ In Web3 applications (not L1s), execution of changes may currently be semi-centralized (multisig, code access, etc.), but the community effectively controls a project through wallet-based voting (selling assets or governance votes) and expressing opinions.
10/ In Web2, users cannot vote with their wallets at all—they can only buy stock at absurd valuations post-IPO. Today’s crypto stakeholders receive airdrops, can yield farm, and participate in project distribution much earlier.
11/ Web3 stakeholders (whether capital allocators or retail participants) are in a far better position: they gain early ownership (revolutionary) and incentives compared to post-IPO stock purchases; anyone can propose changes on governance forums, whereas Web2 VCs have exclusive access to corporate boards.
12/ In Web3, ownership and power to effect change are available earlier and open to everyone.
13/ Back to VCs—in both Web2 and Web3, they must deliver all traditional value-added services: legal help (entity formation, deal docs), operations, hiring, talent retention, even acting as therapists or having long calls about vision, direction, and resolving internal conflicts.
14/ But in Web3, to stay competitive, VCs must also become active, day-to-day members within the community.
15/ These activities include thinking through tokenomics and incentives, future products or use cases, engaging in active governance discussions, promoting the project, etc.
16/ In Web3, VCs are stakeholders just like anyone else—but let’s not forget, their LPs can now also play an active role in supported projects. A Web2 VC fund’s LP cannot enter Uber’s discussion forum and propose sweeping changes. https://threadreaderapp.com/thread/1473767899806547968.html (see for detailed discussion)
17/ Regardless, perfection is a moving target. I believe the best Web3 VCs will evolve significantly over the next few years. Here are some predictions:
First, these VC funds will become more like DAOs!
Currently, I view this as an internal process to broaden inclusivity and incentivize sourcing and portfolio company work, where all fund members are active—no passive investors.
Why not open the doors completely, allowing anyone to invest or redeem freely within an open Web3 investment DAO structure?
TLDR: Regulations (in the U.S.) make running a compliant, permissionless investment DAO extremely difficult.
First) A risk capital fund raising money in the U.S. must register with the SEC as an investment adviser unless it qualifies for certain exemptions—Private Adviser Exemption (assets under $150M) or Venture Capital Exemption (no more than 20% invested outside qualified assets). Most crypto VC funds don’t meet these criteria to become ERAs (Exempt Reporting Advisers) and must register immediately with the government.
Note: Even if a DAO wants to use one of these exemptions, it still must comply with all rules (KYC/AML, formation of GP and I-advisor entities, leverage limits, redemption rights, etc.). Moreover, since most believe crypto assets will be classified as securities, the venture capital exemption merely kicks the can down the road. Once a fund grows large enough and exemptions no longer apply, it must become a registered investment adviser.
I’d need 100 tweets to cover everything, but essentially, legal constraints, operational requirements, and reporting burdens are insurmountable for decentralized funds.
Here’s a quick summary (excluding all the headaches):
A 2017 study by the National Venture Capital Association estimated annual compliance costs of ~$60,000 for ERAs and $330,000 for RIAs. https://www.jdsupra.com/legalnews/from-era-to-ria-an-overview-of-6123950/ This is the first in a series of blogs highlighting similarities and differences in SEC exempt reporting regimes.
Second) Aside from investment adviser exemptions, funds must also comply with Investment Company registration requirements or file with the SEC. Most funds use 3(c)(1) or 3(c)(7). Funds without passive capital typically rely on the 3(c)(1) exemption under the Investment Company Act, which limits beneficial ownership to no more than 100 persons (this includes looking through entities formed to invest and hold, where multiple individuals count toward the total). You could try 3(c)(7), but it requires all LPs to be “qualified purchasers” (tested on whether you’re an institutional investor and/or wealthier than accredited investors).
Funds seek these exemptions to avoid ongoing disclosure, board activity requirements, prohibitions on关联交易, and trading restrictions like short-selling and derivatives. See below.
https://www.strictlybusinesslawblog.com/2017/09/21/3c1-funds-vs-3c7-funds/
18/ For investment DAOs, these exemptions don’t work because:
3(c)(1) – Works only if you have 100 or fewer LPs (a problem) and don’t publicly offer your partnership interests. A typical DAO (large membership, no KYC, etc.) cannot comply with registration requirements, and it’s unclear if even smart contract-based traditional funds could.
3(c)(7) – Requires all LPs to be qualified purchasers (i.e., own over $5M in investments), which contradicts global accessibility to DAOs.
19/ I believe “eventually” all funds will aim to become on-chain clubs, evolving into DAO-like structures with easier investment/redemption mechanisms and effective rewards for contributors doing specific work (sourcing, portfolio support, etc.) or adding value (operations, legal, coding, etc.). Why?
Simple—crypto is community-driven. Large funds that fail to adapt won’t compete with the entire community. Five people around a VC investment committee can’t outperform millions globally.
20/ Forward-thinking funds are already exploring these models.
21/ We’re already seeing it—projects enabling on-chain funds like @SyndicateDAO, @enzymefinance, @BabylonFinance, and @spar_protocol. Examples include @VENTURE_DAO, @TheLAOOfficial, and historically, the clearly ahead-of-its-time “DAO.”
22/ TLDR
- Jack is wrong because he focuses on BTC, has never built DeFi/Web3 apps, and hasn’t worked with VCs.
- In Web3, VCs are just community members like everyone else.
- Web3 funds are still evolving.
23/ I hope that most (in the future) will achieve full community ownership and participation opportunities on-chain.
- So far, regulations have prevented funds from becoming DAOs, but forward-looking internal changes are possible today.
24/ Thanks to @lex_node and @SH_Brennan for the conversations on this topic. In the new year, we might turn this into a longer post.
Reminder: I am not a lawyer, so do your own research.
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