The DAO of (Risk) Capital

Thousands of strangers recently came together to bid on an original copy of the U.S. Constitution at Sotheby’s.

I was one of them.

If you’re into crypto / web3, then you know what’s up.

If you’re not, then you may have come across a story about it in The Wall Street Journal or The New York Times … but maybe you’re thinking: scam!

In brief, a group of people formed a decentralized autonomous organization — a DAO — to crowdfund a bid for the Constitution (and deal with all the legal and financial rigmarole).

ConstitutionDAO’s target was $20M.

It raised more than $40M.

In ~ 96 hours.

Alas, ConstitutionDAO lost the auction … to Ken Griffin of Citadel … which is comical for a variety of reasons.

Griffin bought it for $42.3M. It’s the most expensive historical document ever purchased.

Despite the outcome, participating in this experiment has been awesome.

I mean look at these comments:

Once you see the power of a networked community first-hand, you can’t unsee it.
 
It’s like The Blue Marble photo from Apollo 17 — it changes your perception of the world.

* * *

I don’t mean to be hyperbolic, but web3 has the potential to change everything.

It’s definitely going to change capital formation and entrepreneurial finance.

DAOs can help close the financing gap for businesses all around the world. While it may be a stretch to say that DAOs will disrupt the VC / PE fund model altogether, consider the following

  • Fundraising — Preqin data show that fund managers are taking 11 months to reach a final close in Asia, 25 months in LatAm, and 50 months (!) in Africa (YTD 2021).

    This is just a horrifically inefficient market, with untold sums of wasted time and expenses, and countless volumes of CO2 emissions belched in the atmosphere as people crisscross continents collecting capital commitments.

    ConstitutionDAO raised over $40M in four days, seamlessly aggregating commitments from ~17,500 wallets. The median contribution was .0525 ETH (~ $225), with the top-quartile breakpoint at .1776 🇺🇸 ETH (~ $750).

    Rather than approaching hidebound institutions and gatekeepers, a DAO can directly target true fans / believers — regardless of their ticket size. And the magic is that rather than a handful of people marketing a fund, the community supercharges the fundraise.
     
  • Sourcing — Instead of paying overheads and expenses for a centralized investment team to scour for deals, members of the DAO could originate, diligence, and vote on potential investments. 

    At first glance, this may sound like a recipe for disaster. 

    But I suspect a DAO would uncover more projects — especially in underserved markets (whether by demography, geography, scale, or vertical) — than traditional funds. And the elimination of fee drag would make more of those deals viable.

  • Alignment — The tokenization of securities enables participants and stakeholders in a deal to attain tighter alignment. It can alleviate the principal-agent problem, spread ownership within the investee company, and even facilitate the participation of external stakeholders.

    Tokenization also could enhance alignment on value creation, particularly on revenue generation. 

    In addition, token holders could receive a variety of pecuniary (i.e., airdropped dividend payments) and non-pecuniary benefits (e.g., exclusive content, limited release products, etc.).
     
  • Transparency — Blockchains provide greater transparency and auditability than user-generated Excel spreadsheets. Cash flows are visible on-chain in near-real time.

    For instance, you can see the entire history of ConstitutionDAO’s contributions here, and can click through to each wallet’s transaction history. 
     
  • Exits — Investors don’t have to wait for a liquidity event. A DAO’s tokens could be liquid on day one, and investors could swap their holdings on a decentralized exchange for any number of cryptocurrencies, including stablecoins tied to the U.S. dollar.

* * *

Look, of course there are numerous issues raised in the bullets above, and loads more that weren’t even alluded to.

Developing an ethical, effective, compliant, and secure protocol is hard.

For example, even though I was excited to participate in the ConstitutionDAO experiment — and am amazed at what the team accomplished in so brief a period — I had a few hesitations.

One was participants’ reading comprehension: people seemed to think they were going to own a fraction of the Constitution (i.e., a security token) when the homepage of the DAO clearly stated otherwise.

Another pertained to governance. In return for contributions to the DAO, participants received $PEOPLE governance tokens that granted the right to vote on proposals, etc. These were allocated on a pro rata basis (i.e., a donation of 1 ETH granted you 1 million $PEOPLE). So, the biggest contributors had more votes. 

Not great … but also … as the Constitution recognized … direct democracy isn’t great either. I don’t have a firm view on an optimal solution, but I’m allergic to concentrated power in any form.

Yet another was the “gas” — the fees incurred to transact on the Ethereum blockchain. They’re too high, and they’re making ETH unusable.

Jumping from the specific case to the general, there’s a gigantic airgap where cyberspace / web3 interfaces with meatspace / reality. 

It’s one thing to get a DAO together to crowdfund a collectible or invest in a handful of hackers coding something in Solidity. 

But creating a community that has the vision and stamina to build impactful businesses and real assets in underserved markets is a challenge of a different order of magnitude.

* * *

This is the decade of digital assets.

I’ve spoken with a few people about the nexus of crypto and private markets over the last year or so — even floated the concept of a venture DAO with one or two — but I’d been downright lackadaisical when it came to putting my thoughts down in writing.

I thought there was a lot of time.

But ConstitutionDAO demonstrates that things are moving fast in web3.

And ConstitutionDAO isn’t the only story. Take a look at AudacityDAO.VC, and MetaCartel, for example.

I’m stoked that I’ll be ringing in 2022 with the Wharton School’s inaugural course on the Economics of Blockchain and Digital Assets.

I’m hoping that it will enable me to develop a business model / protocol for entrepreneurial finance in web3, and meet people who are building in the space.

We’ll see!

* * *

One more thing.

Portico’s undergoing a slight brand refresh over the holidays.

Our website will be down for a bit, but we’ll be back in the new year with bells on.

Have a great finish to 2021!

Best wishes,
Mike


Gopal Jain on India’s Transformation

Episode 12 of the Portico Podcast features a conversation with Gopal Jain — co-founder and Managing Partner of Gaja Capital, one of the leading private equity firms in India.

It was a real pleasure to speak with Gopal because he’s lived through the boom-and-bust cycles within India’s private equity industry. Therefore, he’s able to place today’s environment in context, and impart some of the hard-earned lessons he’s gleaned over the last two decades.

We cover a lot of territory in the episode, so you don’t want to miss it!

Check it out on Apple Podcasts | Google Podcasts | Spotify


Grab Bag

  • Sequoia’s Roelof Botha on the decision to eschew the traditional VC fund model (link)
  • Franklin Templeton buys secondaries firm Lexington for $1.75B (link)
  • Temasek launches $3.3B investment platform for firms eyeing global expansion (link)
  • Baring Private Equity Asia financing remake of Metal Gear Solid 3? (🙏; link)

Wall of Shame

Blackstone | KKR · US doctors fear patients at risk as cost cuts follow private equity deals (FT)


From the Bookshelf

Why has government been instituted at all? Because the passions of men will not conform to the dictates of reason and justice, without constraint. Has it been found that bodies of men act with more rectitude or greater disinterestedness than individuals? The contrary of this has been inferred by all accurate observers of the conduct of mankind; and the inference is founded upon obvious reasons. Regard to reputation has a less active influence, when the infamy of a bad action is to be divided among a number, than when it is to fall singly upon one. A spirit of faction, which is apt to mingle its poison in the deliberations of all bodies of men, will often hurry the persons of whom they are composed into improprieties and excesses, for which they would blush in a private capacity.
 
In addition to all this, there is, in the nature of sovereign power, an impatience of control, that disposes those who are invested with the exercise of it, to look with an evil eye upon all external attempts to restrain or direct its operations.

— Alexander Hamilton (aka Publius), The Federalist. No. 15 (1 December 1787)

Ep. 3: Fintech & Financial Inclusion



In the third episode of The Portico Podcast I speak with Monica Brand Engel — a co-founding Partner at Quona Capital, a venture capital firm focused on fintech for inclusion in emerging markets.

If you’ve looked into EM fintech, you’ve probably come across Quona and their portfolio companies.

For example:

  • Sokowatch in East Africa, a working capital provider and last-mile distributor of fast-moving consumer goods to informal retailers;
  • Coins in the Philippines, a mobile, branchless, blockchain-based platform that provides unbanked and underbanked customers with direct access to basic financial services (and which was acquired by Go-Jek in 2019);
  • Or Konfio, a digital banking and software platform for SMEs in Mexico, which received a $100m investment from Softbank as well as a $100m secured credit facility from Goldman Sachs last year.

I was excited to get Monica on the podcast because she has built a career in two of the most compelling themes around: financial inclusion and financial technology.

Our discussion opens with her walking us through her career trajectory. We then talk about the convergence between philanthropic and commercial investment across emerging markets; the commonalities and idiosyncrasies across the markets in which Quona invests; the quality of fintech entrepreneurship in EM; the prospects for technological and business model innovation to migrate from emerging markets to the United States and Western Europe; and the biggest obstacles fintech startups encounter as they attempt to scale, among other topics.

I hope you enjoy our conversation.


This podcast was recorded in October 2020.