If you joined Part 1 of The Idea Maze, “Farcaster: a breeding ground for turning ideas -> action,” I began to share my journey on Farcaster and my take on how important it is to follow the idea maze until you reach the end before beginning something new.

It was admittedly high-level, armchair philosophizer-grade stuff you’d probably expect from an MBA student naval gazing at the infinite theoretical possibilities.

So, let me share some of the realizations I’ve had along the way.

Realization #1 - investment DAOs are sub-optimal

Stop 1 on the journey of any aspiring investor in Web3 within the last five years has to be an Investment DAO.  The only thing is, they’ve been tried again and again and again, and they don’t work.

After thoroughly investigating the background and current state of every existing Investment DAO, it became clear that while a great concept on paper, communal voting for deploying pooled capital is sub-optimal.

It's hard enough to gain consensus and keep a partnership together when there are five Partners and a dedicated pool of capital. The idea of gaining consensus efficiently and repeatedly enough to hold together a large disparate group of investors at scale is highly improbable and, at best, a PITA.

Why not scope down and focus on fewer Members with higher financial contributions? If you're going to do it, this is the way to go. But then, how is this materially different from a traditional angel syndicate?

Its not, its just worse. As an individual investor, you have less influence over how your capital is deployed (i.e., there will be times the group votes to invest the pooled capital into an asset you don't support, and there will be times you want to invest the capital into an asset the group doesn't support).

Realization #2 – generic syndicates are tired, and crowdfunding models are a last resort

Okay, so Investment DAOs are out. A traditional syndicate must be the path of least resistance. Let's do that!  We could, but… there are plenty of quality syndicates. The world does not need another one, even if it’s onchain and Farcaster-native.

While technology providers like AngelList and Carta deserve tremendous credit for revolutionizing the angel investing industry, the model's core is the same. AngelList and Carta have built tremendous, industry-defining businesses by providing the picks and shovels to syndicate leads and creating an online marketplace to match LPs with deal sponsors.

Well, what about crowdfunding? – I’ve been around crowdfunding since the very early days (~2010). I actively used all the major crowdfunding platforms (e.g., Republic.io, Kickstarter, IndieGoGo, WeFunder, YieldStreet, Crowdcube, Seedrs, LendingClub, GoFundMe, you name it).  

Why?

Because I saw the potential to unlock access to capital and reduce barriers to investing, I was fascinated by how they were evolving – and I was rooting for them to succeed. I am even a small investor in one.

While crowdfunding platforms have raised retail investor awareness of Alternative Assets, the model is fraught with issues. The numbers speak for themselves: despite over $1.0 billion being invested through crowdfunding platforms each year, there has been only one material exit, revolut, a UK-based consumer fintech firm currently valued at $44 billion.

Aggregate data on financial outcomes is scarce since platforms understandably advertise invested capital and not capital returns. Because of that, I can only speak anecdotally, as someone close to the industry for the last fifteen years, when I say that the financial outcomes for investors must be far worse on a risk-adjusted basis than those of other investment options.

Though well-intentioned, the business model's core is flawed. For one, incentive mechanisms are misaligned. Crowdfunding platforms, like angel syndicates, encounter the pressure to lower the bar for deals they’ll syndicate because more volume leads to higher revenue. It’s a transaction fee-based business model.

A nominal amount of “skin in the game” is invested, but it's often insufficient to align stakeholder incentives between the deal sponsor and LPs. While most deal sponsors earn carry on the upside, that does not begin to pay out for 8-10+ years at best, and then it's a highly unpredictable, lumpy revenue stream. 

For most crowdfunding platforms, that isn't a feasible business model; bills must be paid, so admin fees are charged, and volume creeps up as standards slowly become less stringent.  

If individual investors seem to get the short end of the stick, crowdfunding isn’t much more attractive for founders. Over the years, I’ve worked with numerous founders who have considered crowdfunding options in their quest for access to finance.

I can tell you from experience it’s a lot harder than it often appears. The average success rate of a crowdfunding campaign is under 23%, and launching one successfully is as hard, if not harder, than a regular fundraise.

Furthermore, there is a negative signaling element. Historically, only startups that have struggled to raise funds from “smart money” institutional investors have turned to equity crowdfunding.

The perception has become so ingrained that even if a top-tier startup wanted to publicly raise funds from users/community members via a crowdfund, they would likely shy away from it because of the negative signal it sends to future ‘smart money’ investors.

Though not quite as severe a reputational risk, many top founders I know also hesitate to have any portion of their round syndicated semi-publicly via an AngelList syndicate.

There must be a better way.

Realization #3 – Token tipping, like Kickstarter, is good but insufficient.

In 2024, token tipping to support projects people like has been popularized within Web3 social ecosystems like Farcaster, Lens, and DeSo. It existed previously, but this time, it has a different feel. It's more about supporting projects/founders and less about perceived potential for future monetary gains.

I love that people can support founders they like with a straightforward tipping mechanism. For founders, it's a fine way to offset some costs of bootstrapping an early concept, and potentially, most importantly, it provides a massive boost of morale to see a small but mighty community begin to rally around you. But it’s hard to imagine a world where it's enough to grow the business sustainably.

The capital requirements to scale a business are too great for a group of individual, non-accredited retail investors to pool together in tips. Especially when part of the company’s challenge is distribution.

It works well enough today in a shallow, relatively non-competitive market, but as the concept matures, the startup will require increasing resources to manage it. Once at scale with a defined user base and distribution, it's unclear whether the juice will still be worth the squeeze. Time will tell.

Realization #4 – Someone needs to take the ‘best of’ elements of syndicates, crowdfunding, DAOs, and tipping and take a crack at a new model

First, we need new goals.

The goal shouldn’t be to increase access to venture capital for every startup and investor. Venture capital is a tool in the financing toolkit best used by a particular profile of startups and investors.

As a financing tool, it receives the lion’s share of public attention, routinely overshadowing other financing mechanisms for growing a quality business.

I support democratizing access to opportunities, but not if doing so results in knowingly democratizing it into areas it was not designed to be and in return setting everyone but the marketplace/platform up for disappointment.

For businesses that venture capital is not designed for, a few alternative solutions I like include profit share agreements and advanced purchases. If the goal is stakeholder engagement and financial ownership, these tools deserve further exploration.

Second, we must determine how to be more targeted and intentional in our approach. We must mobilize not just anyone with a pulse and $100 willing to take a flier on a founder but the right people at the right time, in the right way.  There is certainly space for someone who wants to take a random bet on a founder or idea, but it can't start with that profile.

Not all individual retail investors are the same. If you segment us, we engage in many buying behaviors and purchase reasons beyond just financial returns.

Understanding those motivations and intentionally designing the product/experience to meet them is essential. Current crowdfunding platforms and investment syndicates have oversimplified the buyer persona.

Third, creating incremental value for traditional venture capital firms is imperative.

By doing this well, you should be able to simultaneously remove the stigma associated with a public community raise and become an ecosystem ally—and in doing so, start seeing top-tier deal flow.

So, what's left if it's not a fund, an Investment DAO, a syndicate, or crowdfunding?

This question is where things begin to get interesting. It's the end of the idea maze or the beginning of the true innovation frontier. I found myself here not long ago, asking some challenging questions:

• What would it look like to start from first principles and re-construct the mechanisms for financing high-risk, high-growth early-stage ventures?

• Today's landscape is uniquely different from what it was like in the 2010s when AngelList syndicates and crowdfunding platforms first emerged. Why do we assume that founder’s financing needs and investors' motivations have stayed the same?

For now, I’m going to leave you with these cliffhangers. I promise, though I’ll share answers to them soon – and in more dynamic ways than in a blog post.