Y Combinator alumni raise $80M for DAO to back crypto startup
Groups of people looking to invest together have turned to the cryptonative DAO (decentralized autonomous organization) structure for a collective decision-making framework. While an investment DAO can typically only have up to 100 members to stay compliant with SEC rules, Orange DAO has found a way to bring over 1,000 Y Combinator alumni together to support web3 startups through an affiliated venture fund.
Orange DAO just raised $80 million in funding, mainly from two strategic investors: tier-one blockchains Algorand and Near, general partner Ben Huh told TechCrunch in an interview.
“They wanted to support our mission to bring more entrepreneurs into web3. For them, it’s very important to work with us and get exposure in front of our entrepreneurs, because if one of our members builds a billion dollar DeFi protocol, will the investment they made in us is trivial compared to the amount of upside they get from it,” Huh said.
The rest of the funding, he added, came from DAO members who became limited partners in the fund itself, as well as some institutional investors.
Members of the Y Combinator alumni web3 venture capital collective, Orange DAO. Image credit: Orange DAO
TechCrunch last spoke with Huh in January shortly after the fund launched. At the time, Huh explained the DAO’s unique structure and why it has been able to remain compliant despite its large size.
The DAO itself is structured as a foundation company in the Cayman Islands, Huh said, while the fund is run as a separate legal entity by Huh and a few other general partners. That way, the fund doesn’t have anywhere near the SEC’s 100-investor limit for a venture group, although Huh and the other GPs leverage the DAO’s hundreds of members to source investment ideas and conduct due diligence.
The group had originally set out to raise $10 million in funding from investors to support crypto startups, Huh told TechCrunch this week. Since January, the group has grown to 1,300 members from 1,000 and backed 90 startups, up from 30 at the time, Huh said.
The portfolio companies include crypto cap table management service Liquifi, decentralized credit platform Goldfinch and crypto payment tool Spritz, according to the group. On average, Huh said, the fund writes $100,000 checks to each company.
As a first-time venture fund, Orange DAO cannot rely on past performance to attract new capital, Huh said. Instead, he sees the benefit stemming from the network of Y Combinator alumni in DAO coming together to help GPs originate and network with opportunities.
“By letting OrangeDAO do the work of supporting our portfolio companies and bringing in deal flow, we’re seeing 10 times more deals than we would normally see,” Huh said.
Legally, the DAO and the fund are separate, but the DAO acts as a “funnel for entrepreneurs to apply for funding,” Huh said. Any profits, or profits, GPs make from the fund are reinvested back into the DAO’s coffers to support new investments, he added.
So what are the benefits of investing through this DAO structure? Huh said members can take the upside by becoming members of the DAO and voting on what it does with the treasury without having to be accredited investors in a venture capital firm themselves. For outside investors in Orange DAO, the appeal comes from the strong network and deal flow stemming from its connection to Y Combinator, even though YC officially has no connection to Orange DAO.
Orange DAO is also funding a fellowship program to pay ~10 Y Combinator founders to work on web3 projects for 10 weeks, with the goal of attracting more founders to the web3 space, Huh added. With the new influx of cash, Huh and his team hope to expand the scholarship program as well as make new fund investments.
The main innovation here is the decision-making process Huh helped formulate for Orange DAO, which he developed through his own DAO accelerator startup, Origami. Origami, which happens to be one of Orange DAO’s portfolio companies, says it also provides services to Techstars’ Constellation DAO and Kauffman Fellows’ VC3. Both operate using a similar model to OrangeDAO for making venture investments, according to Huh.
One challenge these DAOs face is how to distribute tokens to members for their contributions to the group, Huh said. Although Huh did not explain exactly how DAO members are compensated, he said that they have their own metrics and bounties that are used to evaluate each member’s contribution.
Origami’s technology stack seeks to streamline some of the processes involved in coordinating between hundreds of group members in a venture DAO.
“This was one of the challenges of being early in a very nascent industry,” Huh said of Origami’s launch last year. “You have to establish best practices and turn them into really good efficient processes, so between like legal advice, [deal] structuring advice and organizational structuring advice, our services help DAOs start up faster and [through our] software, you have a vertically integrated computer system.”
Note: The article has been updated to reflect that the Orange DAO is structured as a Cayman Islands incorporated company, not an LLC.
