The Paradigm Shift of Venture Capital: Infiniteism Funds and Infinite Games
Great adventures are often infinite games. The purpose of an infinite game is not to win the game, but to keep it going indefinitely; infinite funds invest in the infinite game by investing in its sub-games.Original Title: “The Inevitable Paradigm Shift of Venture Capitalism: Infinite Funds and Infinite Games”
Author: Eric Zhang, DoraHacks
Compiled by: Dewei & DAOctor, DAOrayaki
Venture capital is one of the driving forces behind innovation, technology, and human progress. It helps innovators achieve great goals by organizing human, scientific, technological, and political resources.
In the past few decades, despite the success of venture capital in supporting businesses and startups, it has shown its weaknesses. On the surface, these limitations manifest in two ways: the conflict of goals between GPs and LPs; the lack of alignment between founders and investors. In the stock market, most GPs are constrained by the limited duration of fund cycles (e.g., 10 years).
In the cryptocurrency market, the funding cycles of many GPs are much shorter (due to lower listing thresholds and market volatility, sometimes as short as 1 or 2 years), forcing many fund managers to quickly liquidate positions. This phenomenon has led to some fund managers being criticized as "Weak Hands" or "Flippers."
In the stock market, an Initial Public Offering (IPO) is often seen as a success for a venture-stage company. Often, the main goal of a fund is to invest in targets and sell at the time of the target's IPO. Typically, it takes at least 5-7 years for a company to go public. Thus, the fund cycle represents the idea of helping early companies through the IPO process. The problem with this approach is that if certain companies have a longer-term vision, the fund may miss out on greater opportunities to collaborate with that company and lose out on higher returns from the company's development and growth after the IPO stage.
This is true for all the greatest companies like Netflix, Tesla, Apple, and Google. Recently, Sequoia Capital recognized this issue. Therefore, in a post, partner Roelof Botha described Sequoia's new management approach, which essentially removes LP access to its seed and venture capital funds. Instead, Sequoia invests in primary market transactions from its secondary market fund, reclaiming control over venture-stage projects and the ability to hold venture investments as needed.
In the crypto market, companies go public much faster than the IPO cycle in the stock market. In most cases, cryptocurrency projects go public in their early stages (less than 3 years, sometimes within months of conception). Investors are attracted by the substantial returns brought by the hype of listings. Some crypto funds accept a 1-year fund cycle to attract more LPs. However, a similar situation applies to the crypto market—successful Web3 venture investments require more than one cycle to build, and when a project achieves true success, the returns far exceed those from a single hype period.
The above situation exists due to two types of misalignments. First, there is a divergence between fund managers and fund LPs. Generally, the greater the knowledge gap between GPs and LPs, the longer the fund cycle, and the more difficult it becomes. Second, there is a misalignment between funders and fund managers. The allure of selling stocks/tokens at a liquidity premium during listing events is far greater than spending years waiting for a project to build value.
Given the different types of behaviors, the Venture Capital Game is as follows: 
In the Venture Capital Game, infinite strategies do not mean that the fund holds all stocks/tokens indefinitely, but on the right, the "Flipper investors'" quick turnover strategy does mean that the fund sells all positions for profit and leaves the game to seek other profitable opportunities.
In this game, we consider a new behavior—infiniteness. Infinite games can be understood as playing not to win, but to continue the game (Carse). For founders, the infinite game is evident. For venture funds, infinity means supporting founders to ensure the game's infiniteness.
From the founders' perspective, there are many examples of infinite games. Imagine the following infinite games, which we will revisit later: developing a city, building blockchain infrastructure for decentralized systems, making humanity a multi-planetary species, the geek movement.
So what is infinite risk capital and risk funds?
Technically, we can plot a spectrum of venture capital based on fund cycles—from speculative, opportunity-driven funds to "evergreen" funds. From this spectrum, infinite funds extend their fund cycles to infinity.
But what does it mean for a venture capital fund to be infinite? How can a venture capital fund be infinite? Let’s explore further!
Infinite Games and Sub-Games
Infinite games contain sub-games. The number of possible sub-games contained in any infinite game is infinite. Sub-games can themselves be infinite games or finite games. Here is a table of some infinite games and their corresponding sub-games:
Infinite Funds — Funding Infinite Games
Infinite funds have infinite fund cycles and invest in infinite games by investing in their sub-games. Sub-games can be finite games, but infinite games are the ultimate goal. To evaluate and compare the differences between infinite funds and finite funds, we can consider five indicators: goals, investment motivations, exit strategies, fund cycles, and sources of funding.
The treasury of nation-states is naturally an infinite source of funding, as nation-states themselves are infinite games, typically aimed at developing the country into a better place for people to live. To some extent, blockchain protocols are similar to nation-states because these protocols have their own governance rules enforced through consensus between code and community. In the former case, the treasury is maintained by taxes. In the latter case, the wealth of the foundation comes from the appreciation of its native tokens and revenue at the protocol level.
In the case of venture capital, donations from organizations or individuals that want to unconditionally fund infinite games are necessary to establish infinite funds. Donations can come from various sources: organizational revenue (e.g., protocol fees from decentralized projects), donations, or token sale activities. The fund sustains itself by reinvesting all previous returns into the next sub-game.
As a few examples, DoraHacks Ventures is designed as a geek fund with an infinite funding cycle, as part of DoraHacks, collaborating with the open-source developer funding platform HackerLink, Hackathon DAO, and the global Hackathon community to support the geek movement. Binance Labs supports the development of the entire blockchain industry through venture capital combined with an annually recurring, 8-week intensive incubation program that will run indefinitely into the future.
Funding Public Goods with Infinite Risk Funds
Current venture capital fails to capture a valuable category of venture capital—public good funding.
For a long time, the value of public goods has been underestimated. Due to the nature of public goods being difficult to monetize, they are typically built by the public sector or non-profit organizations. However, government funding may be plagued by inefficiencies, as well as attacks from corruption and political turmoil, while non-profits often suffer from funding unsustainability. Traditional DCF-based valuation methods struggle to accurately capture the value of things that are unprofitable (in fiat currency space) but beneficial to the community. Therefore, in the past, venture capital has focused almost entirely on profitable businesses, leaving public goods out in the cold.
DAOs are changing the way public goods are organized and developed in the following ways:
- DAOs can organize and incentivize distributed networks of contributors and users, avoiding or reducing the friction costs and inefficiencies of centralized organizations. For example, decentralized media can effectively organize a decentralized contributor network.
- DAOs distribute governance rights to participants, including contributors, administrators, users, and funders. Governance rights are no longer concentrated among shareholders.
- DAOs can capture governance value and community-driven value, which may create a legitimate way to provide appropriate valuation for public products in the long run.
- Infinite funds can continuously fund public goods by funding public goods DAOs.
Establishing Infinite Funds Using Web3 Technology
Further mechanisms can be designed to increase the flexibility of infinite funds. There are already some practical solutions. Joining MolochDAO or The LAO allows LPs to gain shares/Loot from the DAO. If the collective fund makes a wrong decision, the Moloch mechanism allows for a graceful exit. But as long as some members continue the game, the DAO can sustain itself indefinitely. Therefore, Moloch funds can be considered a type of low-barrier infinite fund (joining Moloch DAO is much easier than joining Sequoia Capital).
Another way to provide liquidity for infinite fund LPs is to tokenize the fund. Fund tokens can be valued based on the fund's net asset value. Although progress in the securities token (STO) space has been slow, when more attractive tokenized securities emerge in a few years, strong participants can make it possible.
Conclusion
Great ventures are often infinite games. The purpose of infinite games is not to win the game, but to keep it going indefinitely. Finite funds have limited fund cycles. Infinite funds have infinite fund cycles. An infinite game contains an infinite number of sub-games, which can be either infinite games or finite games. Finite funds invest in games they expect to win because they are profitable.
Infinite funds invest in infinite games by investing in their sub-games. The purpose of infinite funds is to fund infinite games so that the game can continue and achieve its goals. As long as it is an infinite game, infinite funds can provide funding for public goods and enterprises. There are several ways to establish and improve infinite funding using Web3 technology. The paradigm of venture capital is shifting towards infinitism.
