This post presents a proposed adjustment and clarification of the prioritized goals of the Dash Investment Foundation (DIF) and how to measure the successful achievement of those goals. As with any project, goals and success criteria need to be well articulated and agreed upon.
In my view, the DIF should pursue two main goals, each aligned to the two types of investment the DIF engages in.
- Venture Capital: Provide a process and a legal framework that will allow the network to fund for-profit ventures in exchange for equity.
- Assets Under Management: Generally increase assets under management.
I consider these goals to be listed in the optimal order of priority. The first goal is directly based on the announcement introducing the Dash Investment Foundation. The Dash Investment Foundation enables the Dash treasury to serve as a source of venture capital and not just as a provider of grants for work on the network and projects. In this article, I outline how I expect that process to work.
A discussion of Assets Under Management will be reserved for a separate post.
In the world of investing, an association of people may pool resources. We can call this association of people a fund, effectively. And as with most funds, they will likely choose to focus on a targeted type of investment.
It might be the case that the fund is established to invest in new companies (startups). Such a fund is called a venture fund or a private equity fund and the money raised by a startup is called venture capital. A share in the ownership of the company is called private equity and is exchanged for those venture capital funds.
Public equity in the form of common stock is similar in concept but comes with fewer ownership privileges and is exchanged on the open market at a stock exchange. A private company does not offer public ownership shares. A public company offers both. Startups begin as private entities funded by private equity funds and angel investors.
Angel investors are individuals who stake their own money in a startup in the form of a private equity investment.
A fund could also be established that actively trades in the market with the goal of making money. Perhaps the first rule of making money is not losing money. One way to avoid losing money is by hedging. Consider this: Maybe we know that there is a 60% chance of a particular asset appreciating. We might be able to bet on the asset going up in price but at the same time hedge. To hedge would be to make a contrary bet that will make the downside less likely or have less severe of an impact. This is difficult to describe in a couple sentences, but the 60% chance of asset price appreciation could mean the hedged position has an 80% chance of returning a profit. One way we can help ensure a fund makes money with more consistency is to hedge.
A fund of this nature is called a hedge fund. The name helps guide the operation of the fund. This more consistent and increased chance of profit comes with a cost. An increased chance of a profit generally means that the profit will be less than if the position was not hedged.
I interviewed a successful angel investor who warned me that only about 10% of startups are successful. A few implications of this statement:
- An angel would need to invest in 10 startups until they could reasonably expect a return.
- Even if an angel invests in ten startups, there is still a 34% chance that all startups will have no return.
- In order for an angel to be profitable, they must select investments with a return which is generally greater than 10 fold.
Let that sink in for a moment.
Professionals who invest in private equity fund a tremendous number of projects that never provide any return. What chance can an amateur have? In a sense, the DIF can also be viewed as a startup which categorizes the DIF in this same class of entities that fail 90% of the time.
The skills needed to establish a successful hedge fund diverge substantially from those needed to establish a private equity fund. Hedge funds will often hire people who are particularly good at math. Such people are called quants, short for quantitative analysts. My gym buddy in grad school, Ganesh, became a quant. The type of math used by a hedge fund might depend on the particular specialty of the fund. Here's a video of my favorite fictional quant: Peter Sullivan from the movie Margin Call. Be aware, there is cursing in this video.
The DIF in Context
From my assessment, for the past year, the DIF has taken on the role of a both a venture capital firm and a hedge fund. Attempting to tackle both roles dramatically increases the amount of mental effort needed. It also requires a much broader set of skills compared to what is needed for just one of these endeavors. I do see an opportunity for the DIF to take on both roles. However, for the purposes of this article I will only discuss the venture capital side of the house.
In his original vision for the DIF, Ryan Taylor identified a missed opportunity—correctly, in my view—involving the Dash DAO (Decentralized Autonomous Organization). Traditionally, the Dash DAO has no means to invest and only a means to issue grants. Ryan noted that the network at times funded for-profit ventures, but, since the only tool available was a grant, there was never an exchange of equity in return. And in other cases, companies that would have potentially benefited the network's infrastructure (an oblique dividend) were passed over because DAO voters were hesitant to issue a grant to a private business. To voters, there was often no direct and obvious benefit to anyone but the business itself.
The DIF was created to address this with an alternative model of funding. The DIF allows for a level of flexibility in contrast to the rigidity of the Dash DAO. Scenarios that benefit the Dash Network by empowering a for-profit entity through funding are made more attractive by offering equity in exchange.
A More Productive, More Manageable Workload for the DIF
Traditionally, startups seek out their own funding. A venture fund that instead goes looking for startups is much more likely to find poorer quality projects. Therefore, the Dash DAO and DIF should avoid seeking startups for investment. Startups should instead seek out the DAO for funding. The DIF would then serve as the point of contact and facilitator for startups who want to conduct business with the Dash DAO.
Once contact has been made, a startup would approach the DIF and offer a certain amount of equity for some value of DASH. For example, "ACME Startup is prepared to offer a 10% stake in our company in exchange for 120 DASH." At that point, the DIF would be expected to begin an investigation into the business, establishing:
- The startup does not break any laws.
- The startup is generally moral and ethical.
- The startup has an appropriate legal structure that will allow a claim of equity to be enforced by a reasonable jurisdiction.
- The DIF and the Dash DAO have no conflict of interest by accepting equity.
- The startup has a business plan that is clear to understand.
- The startup is willing to disclose financial information such as balance sheets and cash flow statements.
This is a sampling.
With this information in hand, the DIF will be in an informed position to form an opinion about the startup and the value of the proposal.
A simple example: ACME Startup seeks a 120 DASH investment
For our example, maybe ACME Startup satisfies all of the requirements, but the DIF feels the offer is simply too expensive. The DIF begins negotiations. The DIF counteroffers with, "We really like your proposal, but we would feel more comfortable if you offered 20% equity for 120 DASH." To which ACME responds, "We'll change our offer to 15% equity in exchange for 120 DASH." In our example, the DIF deems that fair and agrees.
Negotiations over, ACME Startup submits a proposal to the network and asks for 125 DASH (the extra 5 to recover the 5 DASH proposal fee) in exchange for an 15% stake in the company. A representative of the DIF should then state the DIFs opinion. For example, "The DIF Feels that ACME startup contributes meaningfully to the Dash ecosystem. We find 15% equity acceptable and consider the price fair."
The DIF will offer similar guidance for each proposed project:
- We'll accept the equity but the price is too high.
- We feel that due to the nature of the business, it would be harmful to accept equity and we will refuse it.
- We were not informed about this project and are unable to accept equity.
A well-executed negotiation before submission to the network should result in the startup and the DIF speaking with a unified voice. It will also allow some due diligence to be communicated by the DIF.
Note: masternode owners are still expected to do their own due diligence.
Even if negotiations were unsuccessful, the result is still a proposal process with far more clarity. Let's say, for example, ACME Startup offered 5% equity in exchange for 120 DASH, but the DIF stood firm on a 20% stake as being the fair market value. ACME could still make their proposal. The DIF would then be in a position to deliver an informed response.
Perhaps, they would not attempt to block the proposal from passing, while still accepting the equity. The statement in that case might go something like, "We don't feel the valuation is fair to the DAO, but we will accept the equity." And perhaps ACME would respond with, "The valuation is fair because blah, blah, blah." Positions are articulated and the masternodes (who direct the DIF) are then free to decide, but from a more informed position.
This is a process that can be implemented today. There is no need to wait for an investment adviser (though the Dash DAO could benefit from having an investment adviser).
Measurement of Success
In this section I'll outline a minimal condition for success for the DIF. Please understand that great care has been taken to maximize the value provided to all players, including the DAO. This is simply game theory, my dear Watson.
I propose the DIF—for the year from August 2020 to July 2021—will be deemed successful if,
A proposal (or proposals) is passed by the network resulting in equity received by the DIF, which is then is sold to angel investors for $50,000 or greater.
If this modest success condition is met, all the "profit" to the network would be intangible, that is, without a clear valuation (a benefited network by DAO-enabled company). The DAO has money. More money is nice, but the money has meaning only when the money provides a good or service that is valuable. If this success condition is met then the DAO would have funded a company that will enhance Dash Network's infrastructure. At the same time, the DAO will own a successful incubator or partner with an angel who maintains the investment while cycling funds back to the DIF so the cycle can continue.
Angels not only provide money to startups, angels also provide guidance, connections, and networking. An angel offers these services with the goal of positioning their investment, the startup, for success, which, at some point, an angel hopes to sell for a profit.
The DIF does not have the skills that angels do. Additionally, angels specialize. They each have very specialized skills and only fund ventures that fall with the limits of their skillset. Currently, there is no way that the DIF can be as attractive of a business partner as a self-selected angel.
Generally, if the DIF partners with angels that can support DAO-funded ventures, that is a value-add for those ventures. But this relationship would also enhance the funding and facilitation services the DIF provides. Additionally, as the relationshp with angels and the angel community strengthens and expands, the value the DIF brings to the network should compound.
Selling to angels helps close the loop. Without angels, the process is . . .
- DAO invests 500 DASH on a startup.
- The DIF holds the equity for two, five, or ten years before the equity pays out, if ever.
Instead, with angels (the price of DASH is $100 for this example), the process becomes . . .
- DAO spends 500 DASH.
- The equity is sold for $50,000 within three months and the $50,000 is ready to go back to work for the network.
Synergy is a stupid buzz word, but synergies do exist.
Partnering with angels opens the door to multi-party deals. Perhaps two angels and the DAO go in together on a venture. Maybe an angel funds a venture and a proposal is never brought to the DAO; the DIF in that case serving only as matchmaker. Heck, the DIF could still provide value to the network without even putting a proposal in front of the DAO. This opens up many opportunities for the network.
I hope this post adequately articulates what I'm proposing and the flexibility it brings to the network.