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September 27, 2023

Scaling community-driven investing

Inside Hydra Ventures

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Inside Hydra Ventures: Scaling community-driven investing

In this episode, we talk to Peter Pan. He is the co-summoner of Hydra Ventures, the first fund of funds for investment DAOs. Before starting Hydra, Peter co-founded MetaCartel Ventures, the first live investment DAO that invests in pre-seed and seed crypto projects.

Peter takes us through his journey as the co-summoner of Hydra Ventures, the pioneering fund of funds DAO. He sheds light on the transition from traditionally centralized investment funds to a community-based approach, revealing the potential of aggregating deal flow and assessing investments as a collective.

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Show notes

Timestamp

00:00 Introduction

01:07 What is an Investment DAO?

05:55 Origin and inception of community driven investment

09:33 Journey of MetaCartel Ventures

10:42 Inspiration behind Hydra Ventures

12:13 Ideal form of investment DAOs in the future

13:36 Hydra’s mission and vision

resources

Links

Follow Peter on LinkedIn or Twitter

1kx website, LinkedIn, and Twitter

Hydra Ventures website, LinkedIn, and Twitter

MetaCartel Ventures website and Twitter

Show notes

Transcript

[00:00:00] Peter: While traditional venture funds rely on very small group of people to perform exceptionally well. Whereas, investment DAOs, where you are coordinating 80 90 people to work together. You have this massive coordination challenge. However, in a way, you can predict a certain level of deal flow, due diligence, certain level of access that will be always consistently present. it's like pulling together the most connected people making them more GPs to build a whole portfolio and that was really the inception of Hydra's.

[00:00:24] Kaz: Welcome to Zypsy Spotlight. In this series, we'll be exploring new form of venture capital, interviewing four leading founders and capital allocators in the venture ecosystem. Sharing their insights on what the future of venture capital look like. And today we're excited to have, Peter, cosummoner of Hydra Ventures, the first funds of funds DAO that focused on incubating investment DAOs. Traditional investment funds have been centrally owned and managed by select few partners. But instead, what if an entire community of builders became GPS, aggregate deal flow, assess investments, and shared the returns through ownership? In this episode, we'll be discussing the inception of community first investing. We're cohost, I'm Kaz.

[00:01:06] Kevin: I'm Kevin.

[00:01:07] We begin by having Peter explain what an investment DAO is and how it works in comparison to a traditional venture capital firm.

[00:01:14] Peter: Traditional venture funds are run by a couple GPs. And run the whole process of running the fund. From scouting, driving deal flow to due diligence, to closing the deal, to supporting the projects. The variance of performance and venture funds is extremely high. Cause you're really relying on the human judgment and the margins of error on a very small group of people. There's pros and cons of this, as in you can get really high contrarian, thesis driven investing.

[00:01:43] You can also just get people that run it into the ground. I've seen cases of both of this. There's nothing negative about it. It's just really the pros and cons of, rely on a few, a select set of people to run something. Like any business.

[00:01:55] You're really relying on the expertise and reputation of very small group people as well. The idea about investment DAOs is that instead of relying on this very small group of people to drive the entire investment process to run a fund, to invest, you're relying on a community or a larger group of people instead to drive deal flow to due diligence opportunities to close deals and support teams.

[00:02:19] When you rely on groups of people, there's a coordination challenge inherently present. But, groups of people at large, especially when you head into 50, 60, 70, 80 groups of people, they behave fairly deterministically. Larger groups of people generally have better deal flow, network and as a collective unit.

[00:02:38] Arguably have a wider variety and breadth of insight and expertise than a small group of people in a venture fund. I'm not saying that investment DAOs or collective investment organization structures are better than traditionally run, venture funds. I'm really saying it's like a different vehicle and a different way to organize. and deploy capital with, and they come off with different trade-offs.

[00:02:58] While traditional venture funds rely on very small group of people to perform exceptionally well, yes, you don't have the coordination cost of coordinating 80, 70, 90 people to work together, but you're relying on a high level of variance on the performance and judgment.

[00:03:12] Whereas, on the side of investment DAOs, where you are coordinating. 80, 90 people to work together. You have this massive coordination challenge. However, in a way, at scale you can deterministically predict a certain level of deal flow, certain level of due diligence, certain level of access that will be always consistently present.

[00:03:32] When you have 90 GPS in a Discord, portfolio construction is not gonna always be the cleanest or, the amount of contrarian bets that you can do. And around passes or even investments can be limited, but you're gonna, represent a large network of people that, founders typically wanna work with.

[00:03:51] At least the learning for me is that, investment DAOs, behave fairly deterministically if you can. At scale, and if you can get the curation of people right, you can generate a stream of really great deal flow. You can build really great access, you can build really great due diligence.

[00:04:05] And not everything will be as perfect as you'd want it. But, it's a really interesting sort of new rabbit hole for coordinating the deployment of capital. There's like unique benefits that investment DAOs in which investment DAOs can operate in and which traditional venture funds can't, and vice versa as well.

[00:04:22] And that was really the inception of Hydra's just the observation that large groups of people operate pretty deterministically. And that this is a really, interesting and also, High, like low lift weight to effectively create an index basket of the best deals in a market.

[00:04:38] It's like pulling together the smartest people, the most connected people and giving them, making them more GPs to build a whole portfolio of exposure. You're not gonna find people who are like investors who are in these investment DAOs. It's not gonna be like professional GPs, but in a way, they're gonna be builders or angels or, funds all the small funds looking into a certain market investing together. There's this, terrain advantage to investment DAOs in the sense that, these investment DAOs can operate and are typically formed in markets that are far too small and far too early for a dedicated venture fund to be launched, to focus in that area alone, and you really become that's a really great, easy part to becoming the best source of deal flow, the go-to place for capital for founders in that market.

[00:05:22] I think, it's not just the coordination advantage or the coordination properties of investment des but the terrain advantage that, investment DAOs can be, you can build an investment organization off part time. And enthusiasts and casual participation and interest as opposed to needing, needing to convince several very, very smart people to bet the entire career off one market.

[00:05:43] That's both a feature and a bug, too, like in the, it can be a bug in the sense that you don't have enough dedicated members, but it's a feature in the sense that you can go where traditional like capital allocators are typically not investing in.

[00:05:55] Kevin: Coming up, Peter explains the origin and inception of community driven investment, a.k.a. investment DAO, starting with his work in GrantsDAO in the Ethereum ecosystem.

[00:06:04] Peter: I look at my own journey in a way. I never really set out to be an investor. I just happened to stumble into it. And it started with building, and at least for me, I kind of see myself as a community builder, as my first, primary skillset more than anything. And I just happened to build a grants DAO and bootstrap a community with others around, application development within Ethereum. And that was really just the focus. We gave out small grants, we built a community with and we were able to build like a bit of an epicenter and center of gravity for developers and founders back then.

[00:06:33] And by sheer nature, we just had this great access, and really great discovery for new founders and exciting teams and naturally I realized that, hey, we're giving out grants or why not deploy, capital, but for investments where we can, build a business and, or build a fund and do this a bit more long-term sustainably perhaps.

[00:06:53] Based off the grand style, a pool of capital, which just gave out two to $5,000 grants, we proved to have a track record, and then we raised like a small 350k, investment DAO for MetaCartel Ventures and then, build a track record and raise more money and so on and so on.

[00:07:06] If you look at this trajectory, it's a really interesting one. At least I feel like in the sense that I didn't have investment background. The main primary focus was really just community building. And by that you, you build access and, deal flow and if you're then able to structure something to capture the momentum of that, you can start to really invest.

[00:07:22] This is almost a new route in which individuals can become an investors. Build a community first. Turn the community into a community investment DAO and then, deploy. And invest and learn and, begin your journey that way as opposed to, I think like a lot of investors you work at FAANG or a larger company, or you work in, investment banking or you do PE or you do some existing industry for a couple years and then you go into venture or you do venture and then go into operational roles and vice versa. But typically it's the part of venture today is like extremely white collar. It's been glamorized. It's mostly finance people, them trying to understand how to be an investor and understand intricacies of building product and all this. That's okay and that's been a sandhill road path, right? It's like you go work at Facebook, do growth or do product, and then as a PM and then four or five years later, you build up some credentials, you jump into a fund. That's been the whole game.

[00:08:13] What I wanted to do, at least with MetaCartel Ventures, it's just prove that any community on the internet, with exciting and talented builders can somehow grind their way and prove themselves and, coordinate the way into a position in which they can invest into the best of themselves and in a way that didn't need to rely on capital gatekeepers and traditional capital allocators. In a way adds diversification to early stage sources of funding. If you have just the same people, or same archetypical group of people investing and then gatekeeping, what gets to live on an early stage, you just get a very small petri dish of what could actually get to the next stage.

[00:08:50] What's exciting about investment DAOs is it gives a platform for people who don't archetypically see themselves as investors, to become one and to learn how to become one. I think that's really interesting from that perspective. MetaCartel Ventures, to me it was always about not making it the biggest investment now, or the most impressive one. It was all about can we just create an example out of ourselves to say that hey, if you want to build a community and you want to invest in the best of yourselves, invest into each other and be an investor and grow into something like this, you can do so too.

[00:09:18] We did so with very, very little resources. And that's been the thing I've been proud of. We didn't have anyone to back us really. We had a lot of supporters, a lot of founders and some funds, but it wasn't a home game advantage, let's say. A bit of a label of love, if you will. Brute force got us to that point just to prove a point.

[00:09:33] Kevin: Next up, we'll hear from Peter about the journey of MetaCartel Ventures. As a pioneering example of community driven investment, he'll share insights on how they refined their approach to sourcing deals, conducting due diligence, and making investments.

[00:09:46] Peter: We just started mostly early on, invested into the members projects, so we just invested into each other. It was mostly 35, 40 people and there was maybe a couple funds. It was like 1kx, KL one, and maybe a few others. It was like everyone else was just founders and angels, but mostly founders around the space throwing in from like $5,000 to $10,000 an average.

[00:10:08] It was a bit of a pity project. Not gonna lie, MetaCartel ventures, it's started 350K, maybe even slightly less. It wasn't super glamorous and we invested into each other at the start, we invest into the grantees.

[00:10:20] When I say that we wanted to become an example where we wanted to invest into like, our own community members. It wasn't we raised the money and we started chasing the hottest deals in town. It was being the first, an early, first check into Zappo or, rye or each other's projects.

[00:10:33] It was a fairly organic thing and we just tried our best. Even when we were up and running, we were much more of a community than we were trying to be like a fund.

[00:10:42] Kevin: In our following segment, Peter will share the inspiration behind Hydra Ventures. We're curious to know if it's a concept he'd been contemplating for a while.

[00:10:49] Peter: Early last year was coming up to three years of operating MetaCartel Ventures. And there've been many other investment DAOs launched, and I think the observation was, look, there's quite a lot of investment DAOs, right now, not three figure, like a hundred plus, but 20, 30, 40, right around that range. Some have been pretty successful. And the key thing was they all have shared very similar strengths and the differentiating factor.

[00:11:09] That was really two things. Well a couple things actually, the market they were focused on. The member curation and how well they were coordinated. Teams that just did better with like curating members and coordinating, these teams did far better in general in addition to the market.

[00:11:22] Once we realized it was kind of a question of, there's still no professional organization that's focused on investing into these investments and participating in these investment dos and maybe redesigning these structures, iterating on these, and it's just, it was a kind of a why not question.

[00:11:36] We have a lot to learn. Investment DAOs have a long way to go and the more we thought about it internally, at M C B and it just became more of a itch. We got together, designed how we would launch DAO founder funds. First, we just pure brainstorm and experimentation.

[00:11:51] I think that's a first thing. You design it and then noncommittally, see if people like it. And then once we designed it, we have to launch this. It seemed to be a shame if we didn't launch it, given everything we learned and how much further, more potential we see. We got everyone together went to the most active investment participants across web3 and, built a little membership and launched earlier this year.

[00:12:13] Kevin: In the next section, Peter will discuss the significance of collaboration and curation. If these factors continue to grow and change over the next two years, how does he imagine the ideal form of investment DAOs?

[00:12:23] Peter: I'm not super sure the ideal form is, but I do know that a key focus for evolving, so improving the coordination of investment DAOs is gonna be accountability, responsibilities, and incentivization of that work. Investment DAOs are not just investing, that's the easy part. Putting checks and stuff is easy. Running the operations is difficult. Running portfolio support and portfolio liaisoning is difficult and takes a lot of effort and time. You have all this you have marketing and brand and content. All these things are actually the really difficult things.

[00:12:51] And these are responsibilities. The next step is designing a system in which you can assign responsibilities, create accountability, and also reward people for that accountability and follow through. We have something that looks a bit more like feature parity to traditional venture funds in terms of capabilities.

[00:13:07] Isn't it crazy? Most of these investment DAOs, it's just like fruit checks and everything and like portfolio support? Yeah. Like marketing like operations, I think it was a kind of an open question left open. For MetaCartel Ventures, this was definitely a case, but I think being the first ones through the door and through the wall, we can kind of be like, all right, we didn't foresee these problems.

[00:13:27] We're just trying to do the thing. But then, all these other investment DAOs just ran, like had the operating the same way. And I'm like, this is not okay. We have to change and we kind of have to evolve this.

[00:13:36] Kevin: In this final segment, let's go back to the topic of Hydra Ventures. Peter takes us through Hydra's collaborative efforts in establishing a clear mission and vision. How did they go about it?

[00:13:46] Peter: What Hydra wants to be is a bit of an institution. To say that we were here for investment DAOs at day one, we want to build a dedicated entity for it to support and to be a bit of an anchor for the whole investment DAO ecosystem. One that pushes progress and behaves and operates intellectually, honestly. I think that's been a core, key value of Hydra's. It's a simple goal.

[00:14:05] Kevin: If you liked this Spotlight episode, please leave us a review. We're just starting out, so every review really helps. Follow us on Twitter at zypsycom if you don't want to miss an episode. That way, you'll be able to see every time a new show goes live. That's all from us today. Thank you for listening to this episode of Zypsy Spotlight.