Hydra Ventures DAO was summoned to invest in and incubate the next generation of community-first investment DAOs and to proliferate a landscape of organizational innovations in investing. We’re a DAO fund-of-funds composed of DAO operators, professional service providers, founders, and web3 VCs with a mission to establish new market-standard practices for how investment DAOs are designed and operated.
We’re united by the conviction that investment DAOs are a new form of human coordination that represent a huge upgrade over traditional entities. They can empower niche communities to manifest their common purpose cooperatively, flexibly and with lowered barriers to entry so that specialized knowledge and sweat can be rewarded with economic returns, not just invested capital.
This piece - part one in a series that covers Hydra’s mission, thesis, legal framework, and mechanism design - expounds on why we believe that investment DAOs can not only achieve venture scale returns in cutting edge fields, but can level up existing VC models. We’re convinced that the Hydra DAO design unlocks smarter capital allocation by: 1) expanding the participant set; 2) aligning incentives among members; 3) setting beneficial constraints that focus collective energy; and 4) serving as a persistent “third place” for communities of affinity to share, debate and build their ecosystems.
Hydra DAO grew from a recognition that there was an enormous chasm separating the widespread LFG (“Let’s Form Group!”) coordination energy in web3 from a viable vehicle to harness that enthusiasm. Despite their advantages - global reach, secure on-chain treasuries, trusted governance, friction-minimized - investments DAOs can be hard to bootstrap.
We’re past the stage where serious people are willing to launch or join YOLO onchain-only, entity-less projects governed by liquid token voting.
The technical, social, and legal risks of such initiatives are enormous, but we’ve yet to see the emergence of well-designed affordable frameworks that serve member-managed DAOs well.
Another set of challenges stem from the social sphere. Traditional venture funds are typically comprised of full time general partners who manage the org and make the investment decisions and passive capital contributing limited partners with high net worth. This framework excludes the vast majority of potential participants and doesn’t reward valuable member contributions, nor does it foster strong bonds that build meaningful communities.
Hydra’s Investment DAO Framework
Hydra is developing an organizational model that serves the needs of LFG communities through limited liability legal entities layered on top of a full-stack operational framework that can be quickly and cheaply deployed. We take inspiration from the coordination unlocks that flowed from the creation of the Delaware LLC and the y-Combinator SAFE - frameworks that may not fit all use cases but serve as reliable building blocks without huge barriers to entry. Another piece in this series will explain how we have created a viable, low cost template framework built specifically to address the needs of investment DAOs.
Our investment DAO incubation framework is built to satisfy the practical requirements of running a venture entity while also fostering a thriving culture of active and aligned members. It uses the best tech and practices to reduce overhead costs and the need for full time commitments but still lodges decision making power with the members, not executives or GPs. Our incentive design system rewards members for their valuable contributions in a manner that strikes a fair balance between capital, work and judgment. Here we lay out the motivations underlying Hydra’s innovations on the traditional ventures model.
Expanded Participant Set
We believe that the builders and visionaries creating revolutionary technology are better capital allocators within their field of expertise compared with generalist investors. But fully engaged builders aren’t willing to sacrifice their primary pursuit to become full time investors and even if they did, their insider edge would eventually fade. Further, cutting edge builders in the early part of their career won’t have yet amassed substantial investment capital, so we have a situation where those with the keenest judgment within an emerging field are rich in neither time nor capital.
Hydra’s solution is to incentivize subject matter experts to form investment DAOs that do not require large time commitments while bringing in additional capital providers who want early stage access to the most promising projects within a given sector. We aim to expand the investment participant set from its narrow status quo of capital-heavy professional investors, to bring in those with smaller cash stacks but larger applicable expertise and judgment.
Hydra’s investment DAO framework aligns incentives among its membership through the creation of a pool of incentive rewards to be distributed based on valuable contributions. This system transfers economic upside from more passive members to active contributors in proportion to their value. Our framework gives DAOs an incentive template to iterate from, based on the membership’s needs and preferences.
“Too much choice has a cost.” <span class="author">Hydra whitepaper</span>
One learning from our members’ prior experiences building and sustaining investment DAOs is that there can be such a thing as detrimental freedom. DAOs with an unbounded investment thesis, uncertainty over whether to distribute or reinvest profits, open membership, and no target wind down date have a vast decisional space, and can be fatigued and even divided by trying to govern all of these issues. Hydra’s design takes those learnings and imposes constraints that are designed to limit the decisional space to an investment DAO’s fundamental functions: sourcing deals, performing due diligence, managing and supporting investments, handling internal ops and allocating contributor rewards. Hydra’s framework locks in an investment thesis, fixes the membership set, sets a target deployment date after which time uninvested funds are returned to members, and implements a distribution policy that accommodates diverse member preferences. We believe that these policies will reduce wasted effort, limit disputes and enable greater investment DAO performance as members will find participation to be worthwhile and impactful.
Community as Killer App - The Value of a “Third Place”
A final note about the culture of member managed investment DAOs - they are, without specifically being designed, wonderful community incubators. Communities can discover their unique culture through permissioned forums (Discord, Telegram, Discourse) open to members with proven commitments to collective decision making within a common subject area. Because they don’t require full time commitments, and function largely through sharing insights and analysis and persuading other members to share one’s vision, these organizations function as a persistent “third place” between members’ primary vocations and their private life.
They are community created networks of affinity that provide space for trust building and learning, in addition to the possibilities of financial upside. The clout chasing prerogative of social media is muted and the conversations prompted by members’ diverse backgrounds and interests create the DAO organism much more fully than any thesis or whitepaper or smart contract can ever do. Hydra believes that the web3-enabled future we deserve comes through values-driven experiments in community building.
We believe that community-first, values-aligned investment DAOs unlock a new level of human coordination. We want to bring together the people with the deepest experience and vision within communities of affinity to help shape the growth of their ecosystems. We’re here to supercharge existing communities of talented enthusiasts that are excluded from the current venture investment industry. We do these things so that passionate prospective summoners of investment DAOs feel equipped to build communities that build the future.
Future articles in this series will delve into Hydra’s investment thesis, cover our innovations in integrating service providers into DAOs, explain how we have designed a legal structure suited to the needs of member-managed venture DAOs, and share our internal mechanism design thinking, including how we’ve built out a values-aligned incentives system.
If this piece resonated with you, please get in touch. For a deeper dive into the ideas that motivated the creation of Hydra, check out our whitepaper.