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Research firm Delphi Digital: Web 3 VCs are different from Web 2 VCs, Twitter founder is wrong

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Research firm Delphi Digital: Web 3 VCs are different from Web 2 VCs, Twitter founder is wrong

Research institution Delphi Digital's co-founder Tom Shaughnessy tweeted on the 28th in response to Twitter CEO Jack Dorsey's criticism of Web 3 and VC venture capital.

Review of Jack Dorsey's statement: "Fighting against the heroes for 'Web3'! Jack Dorsey's tweets have been blocked by a16z."

Here is Tom Shaughnessy's statement:

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Web 3 VC is Different from Web 2 VC

Shaughnessy starts by saying that Web 3 VC is completely different from Web 2 VC, with Web3 stakeholders being much better off than Web2. Jack Dorsey is wrong.

He believes that Jack Dorsey's worldview is limited by Bitcoin as the ultimate currency of cryptocurrency, and his impression of VC is stuck in Web 2, which is a far cry from the reality of Web 3 VC. This skewed view comes from rigid Bitcoin extremism, as Jack has not actually taken the time to build or invest in DeFi/Web3 applications.

In Web 3, capital allocators and community members should be one and the same, without a dichotomy. Over time, venture capitalists who are only in it for the capital will be eliminated, as money comes easy. Founders will seek stakeholders willing to contribute to the community.

Jack Dorsey sees VC as a controlling entity of projects, but this actually depends on different VCs and the specific investment structure used. In the best case scenario, this would be a completely community-driven meritocracy. The life and death of each project depend on its community, and if a project does not listen to or moderately adopt community feedback – where the community equals users who are essentially owners – both adoption and funding will leave.

In well-structured projects, VCs do not control the direction of the project, but the community does. Web 3.0 VCs can propose governance proposals, or even a Mumbai university student participating in the community can suggest ideas, both subject to community scrutiny and evaluation.

In Web 3 applications, changes may currently be semi-decentralized, such as multi-signature transactions and access codes, but in reality, the community can control the project: through wallet voting, selling assets and governance rights, expressing opinions, and discussions. Web 2 users may not even have voting rights through their wallets, as they bought stocks at absurd valuations after IPOs. Today's Web 3 stakeholders can receive airdrops, use yield farms, and have earlier ownership in projects.

Web 3 stakeholders, whether capital or retail investors, have seen unprecedented improvements:

  • "Revolutionary ownership and incentives" vs "purchasing stocks after IPOs"
  • Anyone can propose changes on governance forums, whereas Web 2 VCs have privileged access to company boards
  • Ownership and the power to change in Web3 is earlier and more open compared to Web 2

Regarding venture capitalists, whether in Web 2 or Web 3, they must provide additional value. This includes legal assistance (fundraising, transaction documents), operations, recruitment, talent retention, and even acting as consultants for direction, vision, and resolving internal conflicts. However, in Web 3, to remain competitive, VCs must also become active members within the community. These activities include considering token economics and incentives, future products or use cases, active governance discussions, promotions, etc.

In Web 3, VCs are stakeholders just like everyone else. Their investments can also play an active role in projects. If they were Web 2 VCs, they would not join Uber discussion groups and suggest massive changes.

The Future of Web 3 VC

Nevertheless, perfection is a moving target, Shaughnessy states, and the best Web 3 VCs will change significantly in the coming years. Here are his predictions:

VCs will be more like DAOs – Decentralized Autonomous Organizations

He believes this is an internal process that expands the inclusivity and motivation of acquiring and investing in portfolio companies. In such a structure, all members in the fund are active, with no passive investors. So why don't funds just open up and let people invest and redeem at will in a web3 investment DAO structure? This is because U.S. regulations make it difficult for compliant and unlicensed investment DAOs to operate.

The main regulatory obstacles are:

  • U.S. VCs need to register with the SEC as investment advisors. Unless their assets under management are below $150 million, they can act as private advisors; otherwise, they must have more than 20% of non-securities to be exempt from registration. However, most crypto VCs cannot meet these exemption requirements. DAOs also need to comply with KYC/AML, leverage limits, etc. Since most people consider crypto assets as securities, registering decentralized funds as investment advisors is inevitable. A 2017 study by the National Venture Capital Association estimated that the annual compliance cost for ERA is about $60,000, while for RIA it is $330,000.
  • Decentralized funds also need to comply with investment company registration requirements or file with the U.S. Securities and Exchange Commission, with most funds using 3c1 or 3c7. Funds that do not have passive capital usually rely on the investment company law's 3c1 exemption, which requires that no more than 100 beneficial owners hold shares in the fund. Of course, they can also try the 3c7 exemption, but this is for "qualified purchasers," meaning individuals with a certain asset level and investment knowledge. The reason funds want to seek exemptions is to avoid continuous disclosures, director activity requirements, prohibitions on related party transactions, as well as short selling and derivative trading activities.

Shaughnessy believes that even with exemptions, typical DAOs are of no use, as typical DAOs have a large number of members without KYC and may not all be "qualified purchasers" with $5 million in assets, so he believes that all funds will seek to become on-chain clubs and become more like DAOs, making it easier to buy and redeem, and effectively rewarding members for performing tasks.

Forward-thinking funds are already researching related topics: @SyndicateDAO, @enzymefinance, @BabylonFinance, and @spar_protocol. There are also some examples: @VENTURE_DAO, @TheLAOOfficial.