How does traditional VC survive in the encrypted world?

As a fast-moving world about decentralization, deregulation, and flexibility, Crypto is rebelling against traditional VC's passive LP model, 10-year life cycle model, and strong legal framework built around investment. Crypto founders are looking for a funding model tailored for early Web3 startups: community-based funding through investing in DAOs and micro VCs.

While this shift may not be obvious at first, as large traditional funds such as a16z, Paradigm, etc. have made many successful investments in Web3 recently, I think this will change soon.

So far, what has attracted many founders to Sand Hill Road-based VC firms is the fact that those firms have a long track record of successful investing compared to Micro VCs and Investing DAOs, which have not. But the exponential growth of investing in DAOs and community VC investing in the next few years will certainly change that, making more successful investments.

Another reason why large VCs are staying on the sidelines of the crypto market is that they offer not just capital but brands that generate quality connections, while DAOs and micro VCs do not. However, this is changing as large DAOs gradually become the now more recognized brands.

As the time advantage wears off, we will see these community VCs and DAOs being able to invest more. The advantages they have are clear: the democratization and decentralization of money. The success of a cryptocurrency depends largely on how decentralized the project is, and having a few LPs that hold the majority of tokens can actually put the project at a disadvantage. In addition, the community votes democratically on whether to invest in a project, rather than a single partner, which makes this community funding method more suitable for cryptocurrencies.

Second, these investment DAOs and micro VCs provide each project with a large and highly engaged crypto-native community. The community not only provides users and feedback for the project, but also can be a huge network of legal, media and technical support for the project.

Finally, these investment DAOs and micro VCs are often remote and non-legal entities . This enables very flexible and fast investment decisions. Little bureaucratic paperwork, no need for multiple approvals, and legal contracts are a big draw for these remote and non-legal entity crypto projects.

Assuming the crypto industry manages to subvert regulation, these community funding models will continue to grow. If traditional VC is to keep up, it must carve up different parts of the market where it can play to its strengths, rather than trying to compete with DAOs and micro VCs in a Wild West style. These markets may require stricter regulation, more capital and longer-term development horizons. In addition, traditional VCs should focus on equity projects rather than token projects, as this will help them solve the main problem of centralization, as mentioned above, having a large number of tokens in the hands of a VC may harm the project.

The CEX market is considered to be the perfect path for traditional VC . Because of the entry and exit procedures, CEXs must be legal entities and require stricter regulatory approvals. In addition, a large amount of capital is required to list tokens and participate in fierce market competition. Finally, investments in CEXs are usually through equity in the company rather than through tokens (for example, investing in Coinbase Global, Inc., which operates the Coinbase centralized exchange platform). Other tokens that could benefit from tighter regulation from traditional VCs could be centralized cryptocurrencies like Ripple ( XRP ) and Hedera ( HBAR ), or the growing stablecoin market.

So I think that if the traditional VC model is to survive in the crypto world where community VCs and investment DAOs have obvious advantages, it needs to be different and find a way that is more suitable for its own model.

Written by: Uzair Hannure

Compilation: Deep Tide Tech Flow Intern