VCs never innovated on financing structures. They just found a way to invest in companies earlier than ever before. Make no mistake, VCs' injection of capital into early stage technology has accelerated innovation, but it has come at the cost of minimizing the community that these products are meant to serve.
Crypto itself is a novel technology with novel attributes–permissionless, composable, and decentralized. These new qualities brought new abilities for bootstrapped technology to garner support. With new technology and new requirements came creative thinking around capital formation for the first time since the IPO.
In 2017, ICOs came to prominence and quickly captured attention from investors across the space. Yet in 2018, the bear market arrived and brought many of the projects, and their accompanying token, crashing down. The collapse of ICOs also ushered in immense scrutiny from the public, from institutions, and perhaps most importantly, from the regulators.
As public retail funding of decentralized technologies faded, new funding sources appeared and the traditional VC structure re-emerged.
Along this path, intermittent funding mechanisms were tried: namely the IDO and the IEO. But against the backdrop of negative public perception spurred from ICO's, crypto financing tilted towards private rounds, further pushing out the community. Crypto financing today looks a lot like traditional venture investing - Seed to A to B to Token launch.
Venture capital is a powerful mechanism for financing innovation. The current wave of venture funding at increasingly higher valuations has been great for pushing enormous amounts of capital into the hands of founders to build great new products and technology. We are involved in many of these fundraising rounds and have seen our portfolio companies go on to make tangible change in the world. But on the other side, we also realize that venture funding at these higher valuations hurts the community by limiting their ability to get involved in any meaningful way.
VC involvement doesn't need to die, and in many cases is necessary for the survival of early-stage projects building on the bleeding edge. But as capital rushes into crypto, which it will when provided asymmetric opportunity, Funds compete for returns, not longevity.
In some sense, private capital will be dumping on the very communities that will make or break these new endeavors. Community members and smaller retail investors, not private funds, are critical to the future of any network. Decentralization happens because of them - both community and builders alike. Users and owners should be overlapping to the greatest extent possible.
The Power of Micro Communities
At their core, micro communities are small, focused groups where like-minded people dive deep into specific interests or goals. In crypto, these micro-communities can bootstrap billions of value and typically represent the outliers, or the individuals who are most likely to make up initial holdership. Communities like Ordinals, for instance, have created substantial interest in the Bitcoin ecosystem and have driven novel projects to emerge, like Bitcoin-based stablecoins, while network activity, especially in the form of fees, surged. Ordinals were created as a byproduct of organic experimentation and bootstrapped in public markets solely through user interest.
In the case of memecoins, Bonk was created as a community reward token alongside bonk bot, a trading app for telegram, which eventually led to the creation of six other dapps powering bonk and carved out a niche for pump.fun, a novel funding mechanism for community generated memecoins, to reach escape velocity. Bonk rewarded users of Solana as a whole, empowered these users to become owners through bonk ecosystem revenue generation which ended up paving the way for a potentially infinite number of other products to be built alongside it. In both cases, organic distribution and decentralized, fair funding created value which led to greater interest and further experimentation which translated into more value. People care about the projects that they feel they are aligned with and this leads to further creativity, and growth, of those ecosystems.
What Can we Learn from Meme Coins
-Distribution builds community
-Communities build and demand value
-Products get built for communities
-Communities become more valuable
-Investors want to invest in the community and new projects being built in the ecosystem
-Initial meme becomes even more valuable
Democratized Funding
Crypto bootstrapping is possible and can exist beyond the means of traditional routes of funding. For instance, crypto startups have the lowest possible barrier to entry. A set of smart contracts and a powerful idea can fundamentally disrupt the legacy system and change the world, quite literally. This means there will be a lot of new companies, but also means there will be rapid velocity of innovation- as knowledge is open-sourced and existing breakthroughs become useful components for new systems. Crypto projects are uniquely high leverage from a human capital perspective. Traditional companies tend to scale linearly. Uber growth requires more drivers for more riders. Low level open source infrastructure can be built by one person and used by billions.
Because these are typically high leverage human protocols, and look more like cities than companies, democratized funding, while well-suited for any business, found an ideal launching point in crypto. ICOs were an amazing mechanism for capital formation in crypto and should have persisted. They got tokens in the hands of the community early. They decentralized the network early. They reduced the concentration of ownership from the outset.
Yes, some have gone poorly. But this is no different from traditional investing and VC investing in particular. In fact it’s far better. 90+% of VC projects go to 0 or dwindle with no incentive to continue progress. Yet only 47% of ICO investments went to zero. The difference is that in crypto, we all have a front-row seat to the train wreck through liquid markets. In traditional VC, the train wrecks are obfuscated by a (hopefully) performant fund.
Distributed Token Launch (DTL)
The core focus of the DTL is getting the token, and the technology, into the hands of real users, rather than simply speculators. The latter is inevitable, but wherever possible, the end user should be the centerpoint. The idealistic version of this is that no financial capital is used whatsoever. Airdrop on day 1. Free emissions for github commits. Put CTO offers out for 3% of the token supply on twitter, offer ownership in exchange for a task on jokerace, crowdsource the top shitposter on farcaster via a poll.
There should be a preference on token grants to attract talent, in any form or fashion, and builders to the project rather than just a vanilla “ecosystem fund” that takes 4 years to fully unlock. Instead, tokens under this strategy are ready immediately with the objective of bringing talent to the ecosystem on day 1, such as hiring a CFO or a developer relations lead. While we currently do not have a three step process to subvert the funding paradigm or a playbook that guarantees an optimal launch, we are in the process of putting some of our thoughts here into action. More to come…
Conclusion
For the first time in financial history there's a system that rewards permissionless experimentation via an ever-growing toolset of mechanisms and allows institutions, currencies and irrevocable contracts to be conjured with haste and technical precision. Diluting the impact of this permissionless value creation is what we should avoid. Decentralization and long-term coordination happens at the intersection of community and builders, and the two groups should be overlapping to the greatest extent possible. In crypto, one of the primary motivations is to build a financially incentivized community that is empowered to build a future where the products serve their needs and not the needs of rent seeking monopolies. In order to incentivize this community they must be prioritized in the fundraising strategy. The blockchain is a distributed database where trust is established through mass collaboration rather than through a powerful institution that solely retains the ability to control access and censorship– let’s lean into these unique features. We believe that blockchains have become a melting pot of powerful economic vehicles we don’t yet fully comprehend the scale of and working under this context to reshape a new system of transacting and collaboration is an endeavor worth pursuing.
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