I believe NFTs will replace shares as a primary mechanism of company funding, probably over the next 5 years.
— Daniel Tenner (swombat.eth) (@swombat) January 21, 2022
Why?
Because they're just better. There are teething issues, sure, but NFTs are just so superior, they will take over.
To make use of this knowledge... read on.
👇
Reason 1: Liquidity.
— Daniel Tenner (swombat.eth) (@swombat) January 21, 2022
This is controversial - the lack of liquidity in shares protects from VCs and Founders abandoning a project shortly after milking the public sale. This is true in NFTs just as much as in ICOs. https://t.co/y3zJlkSgV9
This is a problem even with very legitimate VCs. It is not unusual, I gather, for VCs (even high profile ones) to dump their entire allocation onto the market shortly after ICO and exit the investment, much like unscrupulous influencers do to NFT projects. This is bad.
— Daniel Tenner (swombat.eth) (@swombat) January 21, 2022
The pros of increased liquidity are really simple: much more stuff can get funded.
— Daniel Tenner (swombat.eth) (@swombat) January 21, 2022
In traditional startup investment, money is locked up for 5, 10, maybe 15 years.
In NFTs, it's not unusual to derisk (basically get the capital back) in a month or less.
If I invest £10k in a startup and I don't get it back for 10 years, I can't reinvest it until I get it back, obviously. If I buy 5 NFTs and I sell one at a 5x a month in, I now have my initial capital back to invest in another project. I can fund 120x more stuff.
— Daniel Tenner (swombat.eth) (@swombat) January 21, 2022
So: liquidity means that money can be recycled into new investments quicker. This means more investments get made.
— Daniel Tenner (swombat.eth) (@swombat) January 21, 2022
It also means it's possible to derisk investments soon. That makes them less risky. Again, more investments get made, an investor can take more chances.
The downsides are the enablement of ponzis and rugs. But as per my thread the other day, I believe this problem will be solved, as huge as it may seem today. Smart contracts, transparency, vetting, education, will solve this. https://t.co/r6VfZ84Hdp
— Daniel Tenner (swombat.eth) (@swombat) January 21, 2022
Reason 2: Global from day one.
— Daniel Tenner (swombat.eth) (@swombat) January 21, 2022
Raising money as a startup is usually a local affair. Yeah, you can pitch VCs elsewhere but they often require you to move. And that's after the Angel rounds, which tend to be fairly local, wanting to meet in person, etc.
By the way, if you like this thread, please RT it to help me out :-)
— Daniel Tenner (swombat.eth) (@swombat) January 21, 2022
And you can find many more threads like this collected at https://t.co/X91GS2GKld .
Raising a £150k round in London is hard work. That's with a good founding team, a good pitch, etc. Thanks to SEIS (a tax break for investors) it's become relatively straightforward to get that first batch of money, but raising more is harder.
— Daniel Tenner (swombat.eth) (@swombat) January 21, 2022
Silicon Valley (and the US more generally) has always had a home advantage that it's just easier to get funding there. Crazier ideas attract money. And those crazy ideas sometimes become Twitter or Google. SV is the epitome of "throw everything to the wall and see what sticks".
— Daniel Tenner (swombat.eth) (@swombat) January 21, 2022
NFTs enable the whole world to participate in this model. There is so much money sloshing about in crypto and NFTs, and it's so inherently decentralised, that any project worth funding should today be able to raise $2-3m whether based in SF, London, Rio, Manila or Timbuktu.
— Daniel Tenner (swombat.eth) (@swombat) January 21, 2022
Given how far $2-3m can stretch if you *are* in fact starting your startup in Timbuktu... that is pretty damn amazing.
— Daniel Tenner (swombat.eth) (@swombat) January 21, 2022
The SV model has gone global, boundless.
Right now it's funding all kinds of garbage everywhere... and it'll get more discerning.
Reason 3: Community engagement
— Daniel Tenner (swombat.eth) (@swombat) January 21, 2022
Crowdfunding evolved over the next few decades as a natural outgrowth of highly engaged brands like Ben&Jerry's wanting to let everyone be an investor. They had the right idea, decades early.
More recently, crowdfunding via sites like Crowdcube, SeedInvest, etc, has sort of taken off... one benefit of doing a crowdfunding round is that, ideally, you end up with a lot of investors who are bought into your visions and become your evangelists.
— Daniel Tenner (swombat.eth) (@swombat) January 21, 2022
But in practice... well, I don't think it really happens. People are excited when they make the investment, but sooner or later they forget about it and get on with their lives.
— Daniel Tenner (swombat.eth) (@swombat) January 21, 2022
If there's one superpower of PFP NFTs so far, though, it's building communities.
The combination of the emotionally engaging profile picture, the incentive alignment of being a co-investor, the way the PFP can become one's identity, the natural marketing that comes from adopting that PFP... all this is dynamite for community building and evangelism.
— Daniel Tenner (swombat.eth) (@swombat) January 21, 2022
And this is still all running on creaky tech that wasn't designed for this purpose. Discord and twitter are "good enough", but I am certain there are far better tools coming that will make us wonder why we put up with such impractical tools.
— Daniel Tenner (swombat.eth) (@swombat) January 21, 2022
Most startups have three questions to answer:
— Daniel Tenner (swombat.eth) (@swombat) January 21, 2022
1) can we build it?
2) does anyone want it enough to pay for it?
3) can we get to these people?
NFTs help superpower Qs 2 and 3. A good NFT launch should leave a startup with an empowered community of early user/investors.
Take indie games, for example. There are thousands of excellent indie games that never find their audience, drops in the ocean. An NFT launch might help them find their early audience and get funding at the same time - two major problems for indie game studios solved in one go.
— Daniel Tenner (swombat.eth) (@swombat) January 21, 2022
It's annoying how ppl often are constantly shilling their NFTs, but viewed the right way, it's a feature, not a bug. NFTs are amazing at turning investors into evangelists.
— Daniel Tenner (swombat.eth) (@swombat) January 21, 2022
It's crowdfunding on steroids. For any startup, this is extremely valuable.
And that's not all - by engaging their investors so well, NFTs create the opportunity for investors to step across the line and help cocreate the product. The alignment of incentives creates both additional trust and motivation that unlocks collaboration on another level.
— Daniel Tenner (swombat.eth) (@swombat) January 21, 2022
A startup that raises through shares may get some occasional help or an intro from their angels and VCs.
— Daniel Tenner (swombat.eth) (@swombat) January 21, 2022
A startup that builds an engaged community of NFT investor-users can tap into their creative power to come up with ideas they would never have dreamt up alone.
Reason 4: Low management overheads and creative funding models
— Daniel Tenner (swombat.eth) (@swombat) January 21, 2022
Shares are a pain in the ass. You need lawyers to make sure you're not breaching any laws. You need regular filings. All sorts of well intended laws make the process expensive and cumbersome.
If you step out of the tried-and-proven paths like options and standard schemes, doing anything creative with shares is basically a giant ballache. And very expensive. So creativity in the space is basically nil.
— Daniel Tenner (swombat.eth) (@swombat) January 21, 2022
NFT investments can access different ways of coinvesting in a startup. For example, let's say I'm an architect passionate about this new collaboration tool, and I want to both use it and invest in its future. I could buy several lifetime memberships (even though I only need one).
— Daniel Tenner (swombat.eth) (@swombat) January 21, 2022
The risk I take is maybe the startup doesn't work out. But if it does, I might resell those precious lifetime memberships for much more than I paid.
— Daniel Tenner (swombat.eth) (@swombat) January 21, 2022
The startup gets money and an engaged, evangelical user base. The user/investor gets to share in the success of the startup.
It's a coinvestment model that not only bypasses the local laws (which could be seen as a bad thing depending on your pov) - but simply does not need them. The relationship is much simpler than that between a startup and its investors.
— Daniel Tenner (swombat.eth) (@swombat) January 21, 2022
We are only at the beginning of exploring all these different ways that NFTs can enable ppl to invest in and support their favourite projects. Many more models will emerge. This is awesome, and another thing that makes NFTs superior to shares - their flexibility.
— Daniel Tenner (swombat.eth) (@swombat) January 21, 2022
Reason 5: Programmability
— Daniel Tenner (swombat.eth) (@swombat) January 21, 2022
Shares require lawyers and cops to enforce the terms of shareholders agreements and articles of incorporation and all that.
NFTs can (though mostly do not, atm, because we're still that early) enforce all that through code.
Take a vesting schedule - a standard thing in many startups that receive VC funding. Typically this requires agreements reviewed by lawyers, signed by everyone, implemented by more lawyers and accountants... Those professionals are very costly.
— Daniel Tenner (swombat.eth) (@swombat) January 21, 2022
With NFTs, this can all be encoded in the smart contracts. Yeah, right now there's a high chance of bugs and exploits. It's the wild west. Electricity has just been discovered and is as likely to provide a reading light as to set your house on fire.
— Daniel Tenner (swombat.eth) (@swombat) January 21, 2022
But eventually, those standards will get developed. The experience will get smoother and less buggy. TheDAO will be an old cautionary tale rather than an ever-present risk of doing business.
— Daniel Tenner (swombat.eth) (@swombat) January 21, 2022
Reason 6: Lower ticket price & no accreditation -> more accessible
— Daniel Tenner (swombat.eth) (@swombat) January 21, 2022
Because the management overheads are so much lower and the market is inherently global, the minimum investment for NFTs is much lower than the typical lower investment for shares.
Combined with the lack of regulation (specifically, the accredited investors regulation), this opens up the investment market to waaaay more people.
— Daniel Tenner (swombat.eth) (@swombat) January 21, 2022
Some see this as a bad thing. Accredited Investor regulation is meant to protect unsophisticated investors from scams.
There's sense in that view, but there's also sense in the view that accredited investor regulations have also thrown the baby out with the bathwater.
— Daniel Tenner (swombat.eth) (@swombat) January 21, 2022
Because of those regs, most people only have access to public markets which give really poor returns.
The highest returns in a successful company's life come in these early years when it's growing like gangbusters. You don't get mega-rich investing in Facebook at IPO, you get mega-rich investing in them at mint.
— Daniel Tenner (swombat.eth) (@swombat) January 21, 2022
Accredited investor regs have basically cut off all the best investments from everyone who's not already rich.
— Daniel Tenner (swombat.eth) (@swombat) January 21, 2022
And it's been done in the name of "protecting the little guy"!!
Even if initially well intentioned, I think accredited investor regs have outlived their usefulness.
The low overhead, low ticket price, and inherently global nature of NFTs open up investment in startups to so many more people.
— Daniel Tenner (swombat.eth) (@swombat) January 21, 2022
Yeah of course TradFi & the govts in their pocket hates that: they've been milking that cow for decades while pretending to look out for everyone else.
Ironically, investing in high volatility, high potential investments makes more sense if you're poor than if you're rich. Cause you have less to lose.
— Daniel Tenner (swombat.eth) (@swombat) January 21, 2022
If you can just scrounge up $1k a year, are you better off sticking it in a savings account with 0.05% interest rate?
Or are you better off making 10 $100 informed bets (which you'll hopefully get better at each year), where if just one of those works out you might get $10k back?
— Daniel Tenner (swombat.eth) (@swombat) January 21, 2022
Startups are an amazing engine of wealth creation - now available to all.
Reason 7: Pay artists instead of lawyers!
— Daniel Tenner (swombat.eth) (@swombat) January 21, 2022
The trad investment process inevitably involves expensive lawyers at various points, on both the startup and the investor side.
NFT project should also get legal advice, but it is only expensive rn because it's so new and unknown.
Otoh, NFT projects, to be engaging, require... art.
— Daniel Tenner (swombat.eth) (@swombat) January 21, 2022
This is maybe a personal perspective, but I'm tired of artists being so undervalued in our society. Science and business help us live longer and more comfortably. Art makes life worth living.
Yet artists are mostly broke!
I consider it a solid benefit of NFTs over shares that to succeed, a project needs good art.
— Daniel Tenner (swombat.eth) (@swombat) January 21, 2022
I hope thousands, nay, millions of artists find ways to make a living by collaborating with startups on their NFT launches.
Many startups could use a bit more artistic sensitivity in their approach to things anyway.
— Daniel Tenner (swombat.eth) (@swombat) January 21, 2022
Wen CAO?
I'm kinda serious - I wonder if some day your average startup will have a Chief Art Officer as a standard position to manage the artistic direction.
Maybe I'm dreaming...
Reason 8: FUN!
— Daniel Tenner (swombat.eth) (@swombat) January 21, 2022
Last but not least in this non-exhaustive list... fun! Shares are so boring. They're all the same, you can't trade them, you can't do anything with them for years and years and years... NFTs engage the "fun" part of the brain.
With their nostalgia-inducing features borrowed straight from collectibles like baseball cards and Pokemons, the ease with which they can be gamified, the way that additional incentives can be programmed in, with utility tokens and airdrops and what not... NFTs are just more fun.
— Daniel Tenner (swombat.eth) (@swombat) January 21, 2022
Who said that investing has to be a boring affair involving spreadsheets and serious faces and suits and ties?
— Daniel Tenner (swombat.eth) (@swombat) January 21, 2022
Why can't you mix profit and fun?
NFTs engage the "fun" parts of the brain much better than shares ever could.
If the fun was the only factor and they were equal in every other way to shares... then it would still be worth switching over to NFTs, because fuck it, we only live once, why should we pick the boring option? Just because money is involved?
— Daniel Tenner (swombat.eth) (@swombat) January 21, 2022
But, as I hope I've made the case, NFTs have many superpowers that make them superior to shares.
— Daniel Tenner (swombat.eth) (@swombat) January 21, 2022
So the fact that they're also more fun is just icing on the cake. It makes the switch even more of a no-brainer.
So to summarise... NFTs' advantages over shares are:
— Daniel Tenner (swombat.eth) (@swombat) January 21, 2022
1) Liquidity
2) Global reach
3) Community engagement
4) Creative funding models/Low overheads
5) Programmability
6) More accessible
7) Artists > Lawyers
8) FUN!
So, if you agree, how can you use that knowledge right now?
Rn, imho, the NFT space is filled mostly with empty projects. Purposeless, they are just redistributive games, ponzi casinos shuffling money from one pocket to the next.
— Daniel Tenner (swombat.eth) (@swombat) January 21, 2022
But there are exceptions. Some people are genuinely trying to build out worthwhile, long term visions.
As @garyvee says 98% of the NFT space rn is going to $0. Those most likely to be among the 2% are the startup entrepreneurs who are making use of this new funding model to build something new and amazing that they've dreamed up.
— Daniel Tenner (swombat.eth) (@swombat) January 21, 2022
I've loved working with founders (and being one) for many years now. I love how idealistic and at the same time ruthlessly pragmatic we can be. How we believe that the world can be better and we can be the ones to improve it.
— Daniel Tenner (swombat.eth) (@swombat) January 21, 2022
In many ways entrepreneurs are artists too.
So for me this is a no-brainer: when picking projects to invest in, I look for that same spark of intelligence and determination in the founding team that I would look for in a startup team.
— Daniel Tenner (swombat.eth) (@swombat) January 21, 2022
Those are the projects most likely to survive the next bear - and even thrive.
This doesn't mean that I only look for "traditional" startups with a business plan and so on. In fact, I don't look for that. And if I saw that I'd be... concerned about this project.
— Daniel Tenner (swombat.eth) (@swombat) January 21, 2022
NFTs enable so much more creativity... I want to invest in crazy awesome ideas.
Entrepreneurs starting up in the NFT space rn have a huge advantage: there is a lot of money out there and not a lot of value, so their projects will naturally stand out.
— Daniel Tenner (swombat.eth) (@swombat) January 21, 2022
That won't always be the case. Eventually this space will be *very* crowded with apparent value.
So the humble suggestion I want to leave you with is: if you agree with my thesis in this thread, try to invest in at least some projects where the founders appear to be entrepreneurs/creators trying to make an important (if perhaps crazy) change to the world.
— Daniel Tenner (swombat.eth) (@swombat) January 21, 2022
My guess is that's where the 1000x (or more) returns will be found.
— Daniel Tenner (swombat.eth) (@swombat) January 21, 2022
The next Facebook might be launching their NFT issue right now. Are you looking for it?
Thanks for reading.
gm & gl