DeFi and NFTs are mere preludes to what web3 technology really has in store for the world:
Bringing company structures on chain and dramatically increasing the success rate of startups.
A company is defined as,
‘A legal entity formed by a group of individuals to engage in and operate a business — commercial or industrial — enterprise’
Companies are really just a legal abstraction that protects individuals from liability and ensures the organization can act as one. Companies can be a couple of guys in a basement or 1000’s of staff spread across the world.
There are a multitude of different legal structures that can be adopted to form a company. Considerations include legal jurisdiction, size, tax implications and governance rules. In June 2022 there were over 425,000 applications to form a business in the USA alone.
Forming a company is a tried and tested method for organizing resources towards a given aim. It is a necessary step in every startup’s journey. The playbook will be familiar to readers:
- An entrepreneur spots a problem in the world and thinks they have an ingenious solution
- They assemble a team of like minded folks who get to work building a product
- At some point the team may raise outside capital to fund their efforts in exchange for giving away equity in their business
- With any luck the team finds product-market-fit and sells a ton of their product
- Society is a better place thanks to the founding teams work and they grow wealthy as a result
Why a company?
Businesses operating in a free market are the primary method modern society has devised for satisfying all our wants and desires. Hungry? Head to your local Walmart and pick from a dazzling array of foods. Need to travel? Your local Ford dealership will sell you a car. Too cold? Too warm? No problem, there is an endless choice of clothes retailers vying for your dollars.
The aims of a given business and the market it wants to operate in will help determine the kind of legal entity it chooses.
In the context of bringing company structures on chain, there are really three features of traditional company structures that we want to maintain in web3:
Liability protection. This means nobody can sue owners for their own personal assets when going after the company. Further, if projects have no legal entity, this opens them up to litigation from potentially any jurisdiction where contributors reside. Adopting a legal entity protects contributors from this scenario.
Asset ownership. Adopting a legal entity allows an organization to own assets and enter into contracts. This makes interacting with the non-web3 world possible.
Ownership. Certain company structures allow for distribution of ownership to anyone who holds stock. This means the ownership is dispersed and can include investors who are essential for helping startups grow..
The bringing together of entrepreneurs and capital under a legal entity aligns incentives, protects all stakeholders and ultimately allows businesses to scale their operations and generate billions of dollars.
What does this have to do with web3…?
So legal entities protect founding teams. Startups solve consumer problems and make the world a better place. What has that got to do with web3?
For every billion dollar success story, how many other projects failed? How can we improve the number of successful startups?
This isn’t just about web3. These questions apply to all startups.
It’s important to note that we need startups to succeed. Not just in a financial or philosophical sense; our society categorically needs startups to succeed in order to solve the myriad of problems we face. Innovative technology is the best way to consistently improve human lives and this innovation overwhelmingly comes from startups.
“Innovation is the child of freedom and the parent of prosperity. It is on balance a very good thing. We abandon it at our own peril” — Matt Ridley, How Innovation Works
So why do startups fail? And how can web3 technology help improve the success rate of startups?
If at first you don’t succeed..
The startup failure rate is around 60%. The three most common reasons for failure are:
- Ran out of cash / failed to raise new capital
- Unable to find sufficient market demand
- Co-founder breakups
Blockchains, tokens and smart contracts (collectively referred to as ‘web3’) can improve the success rate of startups. By bringing the company formation process onchain, we can comply with the laws of the land AND benefit from the immutability, transparency and ownership benefits of web3.
This can be thought of as the emergence of decentralized companies or DeCorp’s.
The combination of tried and tested company structures and web3 stands to turbocharge startup formation and increase their success rate. How?
Running Out of Cash
Web3 can help startups operate with less cash. Start up costs of fully remote teams are low. Costs of forming a legal entity are also being driven ever lower thanks to teams like Kali DAO which allow founders to spin up Delaware series LLCs for the price of a transaction on a L2.
Sporos DAO is pioneering the concept of on-chain sweat equity which can allow founding teams to delay (or bypass completely like Zoho, Atlassian, and Mailchimp) fundraising from VCs. This is possible because Sporos tokenizes work on-chain in the form of sweat equity tokens which carry governance rights. Contributors grow their stake of the enterprise through work and when the business is ready, those sweat equity tokens can convert to liquid tokens (or traditional equity) giving the contributors financial reward for their work.
You can think of the Sporos solution like a dynamic cap table. As the businesses that use Sporos are built, sweat equity is awarded, and the distribution of ownership constantly shifts to accurately reflect who is putting in the most work.
This kind of transparent ownership structure, where ownership is clearly linked to value-add has the potential to attract funding in its own right. If your legal entity, ownership structure and record of work is onchain, investors can appraise your business in a way that has never before been possible.
Early stage VCs are in the business of making bets. They make these bets based on data, whether that is quantitative data like sales or qualitative data like interviewing the founders. Web3 allows founders to push more of their business data into the quantitative category and store that data on an immutable database — a blockchain. This has the potential to increase the confidence of investors and push them to write those all important cheques.
Unable to Find Sufficient Market Demand
Open Sourcing the Startup Process
Open source projects underpin the internet. Linux, firefox, Python, Ethereum are all examples of open source projects on top of which billions of dollars of value have been created.
How does open source create such value?
First, open source allows developers to focus on unsolved problems. Using pre-existing code saves time and energy and means developers can avoid reinventing the wheel.
Second, open source generates new ideas. Allowing developers to study and work with code ignites the creative potential of millions of minds across the globe.
Third, open source saves money. Use of open source is often low cost or free which frees up capital for other value add pursuits.
Finally, open source allows entrepreneurs and developers to learn from both success and failure. This is true on an individual project basis and a macro basis. For an individual project open sourcing code allows other developers to hunt for bugs and improve the security of code. On a macro basis, entrepreneurs can study existing projects and incorporate what they learn into their own projects.
In short, open source allows for the free flow of information and in the digital age, information = power and $$$.
Open sourcing code has a long history of generating huge value. Thanks to web3, we can extend this principle to the entire startup operation.
In the earliest stages of a startup’s life (when most fail) there is often no money with which to pay people to join your team.
At the same time there is a large and growing demand from workers to contribute to meaningful projects of which they own a piece.
Bringing would-be startup contributors together with founders is a talent matching problem which can be helped by tokenizing the work that goes into early stage startups. Imagine if the work you put into a startup was recorded on chain, and that the tokens you earnt represented equity in the business. This incentive alignment can significantly improve a startup’s chances of getting through the difficult bootstrapping phase, as all parties are motivated towards success.
For a startup to succeed, co-founders and early contributors have to trust each other. People simply will not put their time and energy into something if they don’t trust that their teammates are working as hard as they are. Or that they won’t walk away when things get tough.
This need for trust is why it is very common for founders to be friends or ex co-workers before they found a startup together.
Sporos DAOs sweat equity solution can increase trust in teams. Every contributor knows the value others are bringing to the table. It is right there on chain. Further, each contributor has a material voice in the organization through governance tokens. Work harder = more sweat equity = more power in the organization.
The problem of incentivising long-term cooperation in a startup environment can be tackled through tokenized equity. We are only just scratching the surface of labor economics in web3. What is becoming clear is that just as tokens can be used to incentivise certain behavior in defi protocols, they can also be used to incentivise a broader range of behavior such as building businesses.
This is an exciting area of innovation that has potentially wide scale applications.
The web3 space is evolving. Significant technical foundations have been laid. We are now able to start thinking about broader applications for tokens, smart contracts and blockchains. Blockchains can enable new primitives around business formation, corporate governance, and value allocation similar to how DeFi created new primitives around finance
DeCo’s are an attempt to upgrade the organizational methods deployed in the industrial era, and to make them fit for purpose in the digital era.