Blockchain is gaining more attention as it will underpin Web3, a vision for a decentralized iteration of the World Wide Web, which has become an increasingly important area of focus for many investors.
Bessemer Venture Partners, which has earmarked $250 million for Web3 startups, is no exception. But it is also seeking to innovate further by becoming one of the first VC firms to create a decentralized autonomous organization in an effort to provide portfolio companies with a community outside of the firm that can service their needs.
A DAO is a members-only community organized around a set of rules enforced on a blockchain. BVP’s is designed as a place for people in the crypto space to connect and share ideas about products, business development and tokenomics—essentially the study of supply and demand characteristics of cryptocurrency.
PitchBook spoke to BVP partner Ethan Kurzweil to discuss the firm’s crypto strategy and the allure of Web3. This interview has been lightly edited for length and clarity.
PitchBook: Why is Bessemer setting up a DAO, and what is its purpose?
Kurzweil: We wanted to try to experiment providing portfolio services in a new way that’s more aligned to the way crypto projects are formed. They tend to be more community-oriented and collaborative, with groups of people forming and sharing ideas from the very start. Rather than taking the traditional VC model and trying to force that into crypto, we wanted to reinvent how we do things to be more crypto-native from the start.
To get the full breadth of Web3, we as investors need to be open to some tweaks to our model. There’s definitely problems that VCs haven’t experienced or can’t advise on in crypto, but the community can and is willing to provide that support and help in an open-source ethos kind of way.
PitchBook: We are seeing more DAOs being set up with an investment purpose. Is this a new alternative for crypto startups?
Kurzweil: Some DAOs do have capital associated where people contribute pools of crypto to a shared collective that they then use for investments or to buy things. There’s not a whole lot of guys that are doing that, but I think it’s possible that our DAO evolves in that direction where it operates its own fund. But that’s not what we’re announcing now.
I think it’s a bit overblown to say that it could make venture capital obsolete; I see it more like an angel list, where it could help democratize access to private markets, which we’re totally a fan of. I think perhaps most founders are still going to want patient, supportive company builders behind them that have experience taking projects from inception to success. Investment DAOs are complementary to VC but not a replacement.
PitchBook: What areas are you targeting within crypto?
Kurzweil: We’re really looking at three areas, and those are: consumer crypto, so like NFTs, collectibles marketplaces for consumers to engage with digital assets. Then the second thing is DeFi, decentralized finance, and that’s the adaptation of crypto for financial services use cases. And then the last area is crypto infrastructure. That’s providing the plumbing to make crypto accessible to the mainstream businesses and consumers.
At Bessemer, we invest from seed stage to growth. In the crypto world, we tend to skew a little earlier because the space is early in its development on a number of these themes. Our investments over this next year or so will be more early-stage, which we consider seed and Series A, but it’s not impossible that we could invest in growth.
PitchBook: Within the three areas you’re focusing on, where do you see the most opportunity for you as an investor?
Kurzweil: All three are rife with opportunities, but infrastructure is the area that needs to catch up the most. That’s the area that’s going to make it so our parents or folks who are not particularly tech-savvy can use wallets and can use Web3 applications without really even knowing it.
I think there’s a tremendous amount of opportunity there to build the perimeters of this space in a way that makes it work more like the internet has evolved to work with domains, search and easy navigation around sites. We’re not quite there yet for crypto, and I think there’s going to be some enabling infrastructure technology providers that help us get there.
PitchBook: Why do you think investors are now so interested in backing Web3 startups?
Kurzweil: The potential is massive. Web3 technologies have the capability to transform legacy industries, from finance to gaming. Just the idea that you can own a digital item and take it outside of the walled garden of the application or website you’re in is pretty powerful. Right now, you accrue all of these benefits in a game or in a site, and the data is kind of locked in that site, which is then up to the ecosystem you’re in as to when and how to share that.
Crypto in the long term has the potential to have all our data become openly residing on the blockchain, and we can control how it’s used and where it goes. That’s why I think a lot of people are excited by it. There’s always a bit of over-exuberance of some of these new technologies, where they’re seen as world-changing, but it’s going to take some time, so a lot of people are trying to jump in early.
PitchBook: Last week, the EU voted on a bitcoin mining ban that was ultimately shot down. Does it worry you that countries and regulators are having these conversations?
Kurzweil: I think most open markets will trend more like the US, where there was an initial bit of skepticism and then ultimately figuring out that it’s really hard to stop this kind of technological progress from happening. So we should just figure out how to create a set of rules that allows crypto to be compliant with the rules that financial institutions and other money flows have to comply with.
There’s nothing inherently unregulatable about cryptocurrency, and I’m sure there’s going to be some knee-jerk reactions where people want to nip it in the bud. But then they’re going to see that that’s not possible, and they have to get on board.
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