PAID-DAICO Crowdfunding: Giving Wisdom, Startup Accountability and Risk Control to the Crowd
Crowdfunding is loosening the grip of wealthy venture capitalists on startup financing. Retail investor wallets are funding the next great technological breakthroughs in the blockchain, biosciences, artificial intelligence, and many other areas. These are brave waters for any investor. Only one-in-ten startups will succeed.
Startup financing is the riskiest of bets even for battle-worn VCs, but even more so for crowdfunders. Crowdfunders tend to follow the crowd into buzzy trends — most recently, the P2P lending craze. In China alone, over 5,000 P2P startups have failed, sticking investors with $115 billion in losses.
Compared to the venture capitalist, they are at a huge information disadvantage. VCs are actively involved in the management of the startup. Whereas retail investors, after the initial due diligence and funding phases, are largely left in the dark about startup operations.
With the PAID DAICO with built-in governance, investors no longer have to invest blindly in startups. The PAID crowdfunding smart contract ties funding to performance milestones. By doing so, we turn crowdfunding into the smartest money investing in startups.
What is a DAICO?
A DAICO is similar to an initial coin offering (ICO) but more transparent and participative. To launch a DAICO, the project activates the funding smart contract. The investor deposits coins say, ETH, and in return receives the project tokens. These tokens can be traded in the secondary market.
Regular vs Premium DAICO
With the PAID Regular DAICO, investors start with the advantage of access to high quality deal flow. The experienced blockchain investment team at Master Ventures curates and in some cases has incubated the startup projects. The blockchain venture incubator has a strong track record of investing in and nurturing successful projects, among them the PAID Network.
The Premium DAICO model adds governance mechanisms through milestones and deliverables. The governance system holds projects accountable after they raise funds. If projects fail to deliver on their promises, investors will receive a prorated refund.
PAID DAICO Crowdfunding — Leveling the Playing Field With Big Money
Lacking deep pockets, however, crowdfunding investors have an information asymmetry disadvantage. Some traditional crowdfunding platforms do conduct due diligence, but once the startup receives funding, information is sparse. Here’s an all too common scenario: Twitter updates assure investors everything is running swimmingly. The next day, investors are left with a hole in their wallet — the startup is out of funds, out of business.
Venture capitalists, on the other hand, know how each penny is being spent. They have teams of lawyers and accountants to conduct due diligence and monitor operations. They sit on the board and take key management positions to keep a close eye on their investments.
The PAID DAICO levels the playing field by placing accountability mechanisms in the crowdfunding smart contract.
Lack of Accountability
After startups fatten their wallets through crowdfunding, most go into stealth mode. Investors often only become aware of problems on the social media rumor mill. The startup is out of funds, has lost a major client, or cannot get its technology to work in beta tests. If the vesting period has passed, investors can try to pull their funds. But there’s no mechanism for demanding accountability and information disclosure from the startup.
With the PAID DAICO, a startup launches the fundraising smart contract through the “Launch” button and sets the project parameters including token supply, fundraising goal, vesting period and so on. Most crowdfunding proposals stop here. The PAID DAICO also codes accountability into the smart contract.
The crowdfunding contract includes a roadmap of milestones and funding release schedule. The funds are held in smart contracts and released in tranches as milestones are hit, not in one lump sum. In this way, investor money is released based on scheduled progress and roadmap deliverables.
No Audit Mechanisms
What if a project’s performance is not up to snuff? If milestones are not met, any community member can raise a red flag and request an audit. Fine and dandy, but retail investors cannot afford to call in teams of lawyers and accountants to investigate. Alternatively, they can activate the automated auditing and arbitration functions in the crowdfunding contract.
If the community determines the project is not meeting its milestones, it can hold a smart contract-based vote on whether to call an audit by PAID DAICO community arbitrators. When an audit is triggered, project funds are locked until the audit is completed.
The auditors can rule to:
- Verify the project is on track and unlock the funds based on the current or a new release schedule.
- Deem the project has failed to meet its obligations.
No Participatory Mechanism Post-Funding
The Vote mechanism in the PAID contract brings the community of global investors together to govern the contract. In the latter case of a project failure, the next steps are also determined by community vote. The project will either enter a probationary period with the opportunity to rectify problems, or lose access to funding. If the funding is withdrawn, investors will be refunded their proportional share of the funds.
Funds Locked Up in Bad Investments
Typically investors’ funds are locked up in startups for long periods of time. The PAID DAICO audit process compresses the audit time into one or two weeks, from submission of an audit to redistribution of the funds. The milestone process is designed to expose problems and risks of failure early. This allows investors to quickly recoup and redeploy capital. Or if things are indeed running swimmingly, investors can make an informed decision to increase their investment.
Investors who are still playing the horses, that is, putting one lump sum into a startup project, will quickly see the advantages of the PAID DAICO contract with embedded accountability. By significantly reducing the risk of investing in startups and expeditiously releasing risk capital from unsuccessful investments, the PAID DAICO helps more money circulate faster to good projects.
Startups will find it easier to raise funds for innovative technology and ideas from a wider investment community. And when VCs retrench from the higher risk seed financing stage during economic slowdowns, crowdfunding can pitch in with startup capital and keep the economy growing.
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