VC-backed DAO startups are racing to define what DAOs actually are –

Amid the growth in web3, NFTs, DeFi and tokens, institutional investors are also looking at how they can leverage another crypto structure called DAOs to build a new model for community action on the internet.

DAOs — or decentralized autonomous organizations — are at a very weird place in 2022.

The crypto collectives theoretically are designed around allowing groups to make decisions and operate in a structured capacity governed by smart contracts and blockchain transparency, but DAOs that are popping up recently seem to be indistinguishable from each other, with varying commitments to both decentralization and autonomy. While some camps have focused on how DAOs can be used as autonomous governance mechanisms for technologies like DeFi protocols, others are using them to make collective decisions for NFT project roadmaps, while some see the structure simply as a new way to add a crypto treasury to their Discord or Telegram group chat.

The reality is that few people have a tight definition for what DAOs are, leaving room for new organizations to help the crypto-curious make sense of them and help would-be DAO founders make the most of the structure. Founders in the space say that the difficulty in pinning down a catch-all definition for what a “standard” DAO should look like only highlights how broad the opportunities are.

“At the end of the day, DAOs are a collective technology as opposed to an individual one,” Syndicate co-founder Will Papper told TechCrunch last week. “DAOs are kind of the next evolution of the corporation because they encode both voice and exit into their foundations.”

This past week, TechCrunch covered the launch of a16z-backed Syndicate’s play to help people build out fully compliant crypto “investment clubs,” with a network of smart contracts designed to help users build a lasting, stable structure to invest alongside their friends.

Venture-backed startups are looking to help embolden a new generation of DAOs that have varying degrees of blockchain dependencies, enabling founders to use their platforms to navigate regulatory hurdles while relying on smart contracts that these tooling startups have created.

DeepDAO, a dedicated DAO analytics firm, is currently following more than 4,100 DAOs. The groups have evolved considerably since the first-ever DAO, called The DAO, was founded back in 2016.

“It was a very specific, narrow use case that inspired the whole concept of The DAO and set up the industry. Now, essentially the second generation of DAOs use the word completely differently — for them it’s an organization that uses blockchain as a system of record for ownership,” Superdao founder Yury Lifshits says. “Any organization that defines who owns it on the blockchain is a DAO, so that does not require that the governance is defined by smart contracts and it doesn’t say that the governance is decentralized.”

Superdao just closed a $10.5 million funding round led by SignalFire at a $160 million valuation.

Venture capitalists are backing startups building blockchain infrastructure for DAOs, but firms like Andreessen Horowitz and “crypto-native” funds like Variant and Paradigm are increasingly backing the DAOs themselves, which often are also looking to productize the backend infrastructure they built to get up and running initially.

“The fact that a DAO is just software that can can be spun up with the click of a button… but can catalyze thousands or tens of thousands of people — eventually we expect millions of people or larger numbers — that all put together capital and put together ideas to work together for some common goal… we see that as almost the purest vision of what web3 and crypto are all about,” a16z GP Ali Yahya told TechCrunch in an interview accompanying the firm’s investment in PleasrDAO.

Syndicate and Superdao are just a couple of the venture-backed players in the DAO infrastructure space. Other startups like Utopia, Tally, Colony and Layer3 have nabbed VC funding on the promise they can surface new opportunities — some helping people form DAOs more quickly while others prioritize helping users discover them in the first place.

One of the largest areas where tooling startups are focusing attention is in helping DAOs stay compliant with U.S. regulations, incorporating as LLCs or seeking the right structure for what exactly the DAO is aiming to do. Investment DAOs where crypto-rich buyers team together to make investments or back startups as a group have faced challenges stateside, navigating fairly clearcut rules laid out for pooled investment groups among non-accredited investors.

“My prediction is that investment DAOs will continue to flourish outside the United States, but in the United States the legal system is pretty robust and there are relatively solid alternatives in terms of SPVs and rolling funds,” Lifshits says. “It’s on the edge whether investment DAOs in the U.S. will win against traditional investment vehicles.”

Larger investment groups like Orange DAO, which has more than 1,000 members, are relying on more complicated structures that loosely tie DAO activity to a separate venture fund structured as a more traditional vehicle.

While some of the largest DAOs, including BitDAO, Uniswap and Lido, focus on pooled investment opportunities in DeFi, DAO acolytes see endless opportunities for the web3-native structure to reshape everything from how creators and artists monetize their work to how the neighborhood HOA of the future operates. Though compliance presents an ever-evolving suite of challenges, the most persistent landmine for DAO tooling startups has been helping DAOs educate their users on potential threats — something that will only become more important as crypto startups and DAOs look to entice an increasingly mainstream user base.

“There have been DAOs that I’ve been a part of that have accidentally sent millions of dollars’ worth of tokens to the wrong address and then they were just lost forever,” Papper says “We have a lot of protections in place to help users, but there’s always a tradeoff between the protection we give them and the flexibility.”

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