9 min read

Vellir #8 → Decentralised venture capital

Global Coin Research is pioneering a new form of decentralised venture capital. We explore how the $GCR token works and what makes the flywheel turn.
Vellir #8 → Decentralised venture capital

As the crypto markets have nose dived over recent weeks, there have been the inevitable cries that crypto is finally dead, once and for all.

Well played Coinbase, even if they are still playing catchup after coming second best to FTX in the Superbowl advert race (well worth 2 mins if you haven’t seen it)!

Crypto’s not dead, but it is going through a difficult downturn. As we noted in Vellir #5, and was repeated in the Economist last week, this is no bad thing. It helps to differentiate between those projects that have real value from those that do not.

And there are lots of startups building incredibly valuable tools. For example, Arweave, a blockchain document storage system, is playing an important role in the recording the war in Ukraine.

In this weeks note, we’re taking a close look at a web3 community called Global Coin Research (GCR). An innovative community that has pioneered new approaches to investment and how tokens can play a role in incentivising participation, and ultimately help provide returns to the network.

GCR started as a research outfit in 2017, providing a subscription based newsletter to inform readers about crypto and web3 developments mostly in Asia. It’s since evolved into a sophisticated investment club, with a community based research function.

Let’s start with the token.

$GCR was launched in May 2021, has a market cap of over $14m, and is currently priced at $1.45. While the price has fluctuated, and fallen like everything else recently, it has just about held up.

Source: CoinGecko

There are a number of different reasons that people might want to own $GCR tokens.

  1. Membership → the community works on a tiered membership model – owning over 100 $GCR provides Pioneer status; 700 = Gold; and 2000 = Gold Pro. There are currently over 3000 members across the free and membership tiers, and a further 31k signed up to the GCR newsletter. 619 people hold $GCR, 432 of whom have pioneer status or above.
  2. Content generator → the community can access articles produced by the community, with authors receiving a reward for contributing in $GCR.
  3. Events → token holders can access events hosted by the community.
  4. Deal flow → community members are able to propose startup deals and are rewarded if the community invests.
  5. Syndicate → Gold and Gold Pro members can invest via a syndicate in the startups proposed by the community, or the core team, with Gold Pro members guaranteed an allocation.
  6. Governance → The community is managed by a DAO, giving token holders the right to propose and vote on changes to how the community operates.

It’s a really interesting model, and one we’ve taken inspiration from for Project Vellir. It’s worth digging a little deeper into the tokenomics and incentives.

By creating and selling a token, alongside some external funding, the DAO treasury was capitalised. This enabled rewards to be given to members for contributing in different ways. Those contributions largely come via writing articles and recommending deals, both of which add value to the community. The former builds the bank of content, which makes the community more attractive for prospective new members. And the latter creates deal flow, which drives another part of the flywheel.

Once deal flow is provided by community members, due diligence is also decentralised, enabling community members to play a role in understanding the businesses and their relative merits – activity which is also rewarded with $GCR. If the community is given an allocation into a startup’s funding round (more on which below), Gold and Gold Pro members can decide whether or not to invest. If more than five community members commit to invest more than $100k cumulatively, with no single member contributing more than 15% of that allocation, the deal goes ahead.

There is no central GCR entity that community members invest alongside; GCR as a platform just facilitates investment opportunities for its members. And, in general, those members can live anywhere in the world and participate.

For GCR investments that have generated less than 15x return, there is a 15% carry, and for more than 15x return, a 25% carry. Carried interest represents the percentage of profits that will be paid to the fund manager – in this case the GCR community. Any carry is allocated to core contributors and the rest to the GCR treasury.

Let’s look at an example.

A GCR member called Sara thinks a new crypto exchange called ‘Flexchange’ is a great investment opportunity. She proposes it to the community as a ‘deal scout’. Ahmed offers to be the ‘deal lead’ and carries out due diligence on the company and organises communications with the management of Flexchange. Another community member, Moe, handles the operations of the deal, including the admin involved with setting up a SPV for the syndicate.

An allocation of $100k is secured, and 10 members of the community each invest $10k in Flexchange. In 12 months time, the company exits and the $100k is now worth $1m (i.e. a 10x return). The 15% carry on this investment is $150,000 ($1m * 15%).

  • Each of the ten investors gets back $85k (($1m * 85%) / 10), providing a $75k profit
  • The deal lead Ahmed gets 4.5% of the 15% carry = $45,000 ($1m * 4.5%)
  • The ops lead Moe gets 1.5% of the 15% carry = $15,000 ($1m * 1.5%)
  • The remaining 9% of the carry goes to the DAO treasury = $90,000 ($1m * 9%)
  • The deal scout gets $2500 (flat fee) in $GCR tokens from the DAO treasury.
  • NB. There is a 5% admin fee too on the $1m investment to pay for things like tax and the SPV, but i’ve left that out to make it simpler!

Iva is interested in the community but doesn’t have the funds to purchase $GCR to gain membership. She decides to write a deep dive on Flexchange, explaining the problem they’re trying to solve and the business model, and is rewarded with 50 $GCR tokens in return. They have therefore contributed to the community and earned tokens which could later be used for membership or exchanged.

Decentralised venture capital

At the end of 2021, six months after the $GCR token launched, the community announced that it had had access to 120+ crypto and non-crypto investment opportunities.

Of the 50 investments made – which you can see here – only four have launched tokens and therefore become liquid, with average returns of 25x. I’d take this number with a very large pinch of salt: it’s a crude average for very volatile markets, which are taking a beating, and more detailed analysis would be needed to assess how the wider portfolio was doing.

But it does show that the flywheel is working → investment opportunities are being found and investments made. The team have said they expect to double the number of investments they’ve made in the next year.

It’s a brilliant model that incentivises the community to provide deals and carry out due diligence. But at the same time, provides carry back into the DAO treasury, which makes the community more valuable and, subject to investment returns, increases the value of $GCR for token holders.

The DAO treasury can then reward more community members for participating, improving content and make the community more attractive for potential members.

It’s a decentralised venture capital firm.

Source: GCR

As I was researching GCR, I found myself asking whether you could run this model without a token – wouldn’t it be possible to pay the membership and rewards in GBP/USD? Put differently, which parts of the flywheel only work or are materially better because a token is involved? I concluded that the token enables or potentially improves four core parts of the model.

  • Identity – the token gives the community a unique brand and identity. This is attractive for members, who can also see its value.
  • Engagement – a token can be a helpful way to acquire and engage community members, either through price signals or gamification of certain elements within the platform.
  • Asset – a traditional membership doesn’t have a secondary market. If I buy a subscription to my favourite newspaper for £100, but decide later that it wasn’t right for me, that is a sunk cost. However, having gained access to the GCR materials through the token, I could sell these at any time on the open market, turning my membership into an asset. I am incentivised to want the community to become more valuable, as the return on my initial investment would go up. This does however create a challenge with retention, as we discuss later.
  • Governance – using tokens provides the option to give community members governance rights.

The concept of decentralised venture capital is gaining ground elsewhere too. For example, Syndicate – a US based startup and GCR portfolio company – enables its users to create investment clubs on and off chain. And ConstitutionDAO enabled 17,000 people to come together and attempt (though ultimately fail) to buy a copy of the US constitution.

Community investing is a theme we will return to many times at Vellir. We’re just starting to see it’s potential.

A true utility token

While some tokens rely on issuing new coins to raise funds, or ever more demand for the token from new members, the GCR model provides real utility and a sustainable way for the token to retain and increase in value.

You might be asking why, in the example above, Flexchange would give GCR an allocation in its highly competitive seed round over one of the big VCs. But it’s a no brainer. The GCR community members are now all incentivised to root for Flexchange. Yes, the investors and core contributors in particular. But so to the remaining 619 $GCR holders that weren’t directly involved, but will benefit if the investment provides a positive return for the DAO. Hundreds of potential users and evangelisers that are incentivised to help the project succeed is a powerful offer to a startup, and more than worth finding space for on their cap tables!

That’s not to say that VCs aren’t useful – they can provide real value too, whether in networks, hiring or future fundraising. But community investors are the new kid on the block and they’re here to stay.

At its core, this is about democratising access to new investment opportunities, which can only be a good thing.

Where could GCR go next?

GCR is still young. It’s pioneering a new investment model that should be encouraged and developed.

It could yet fail – perhaps because it turns out that crowdsourcing deals and decentralising due diligence isn’t as effective a process for picking winners as centralised VCs; that it relies too heavily on a core set of contributors that don’t feel they are sufficiently rewarded; its decentralised governance model via the DAO leads to sub-optimal decision making; or it fails to retain enough of its users, with liquidity dying up and putting downward pressure on the token.

And it’s not without its challenges.

In a recent memo, the community announced that while its membership was diverse in terms of geography and age, coming from 28 countries and 20% over 50, the average member has ~$250K invested in DeFi protocols and ~$125K invested in NFTs. That’s $400k cypto-assets per member on average – so it’s hard to say that this is really democratising investing...

Retention is also a challenge. Not very many of the 3k community members will be investing regularly in startups as Gold or Gold Pro members (of which there are only around 200). If the community is successful and the token increases in value, it is difficult to prevent members from selling their $GCR and making a return.

My guess is that these challenges are surmountable and the community will continue to grow and flourish. There are numerous ways this could happen.

  • Sub-DAOs could be established that become expert at particular functions, whether sourcing, due diligence or the investing process. These could act like serviceDAOs for each part of the ‘supply chain’, as written about by 1kx recently.
  • The community could find more structured ways to support portfolio companies. This could happen through leveraging parts of a growing community. Or using some of the funds in the DAO to incentivise such activity. You can imagine how $GCR could be given to community members that drive sales, produce marketing material or offer legal services to portfolio companies.
  • The community could develop new products or services. Those might be financial services or DeFi that are linked to $GCR.
  • GCR could create NFTs that could be bought only by community members, which would provide some utility – perhaps access to specific events – and bring in more capital to play with.
  • It’s not impossible that they could raise a fund. This might enable larger investments to be made, with some portion of the carry continuing to go to the community.

It’s early days, but there are reasons to be optimistic about GCR’s future.

What are the takeaways?

It’s an interesting community that is experimenting with incentives, tokenomics and participation. I take three things away from it.

  1. Not all crypto tokens are purely speculative. Some have real utility and underlying value, including $CGR.
  2. Tokens can create powerful incentive structures, which can empower communities and generate flywheels of activity that are self-reinforcing.
  3. Community based investing, or decentralised venture capital, is an important new development, creating innovation in the venture space. It has the potential to democratise access to investment opportunities.

And no, we don’t think crypto is dead!

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