NFTs can & should replace shares. But although they could replace them 1:1, they also enable much more creative ways of raising funding and sharing growth with early backers.
— Daniel Tenner (swombat.eth) (@swombat) February 5, 2022
So I think a better way to put it is: NFTs should make share-based fundraising obsolete.
How? Why?
👇
I've been an entrepreneur for 15 years. One of my businesses raised money by selling shares, and I worked with countless other businesses who did so too. I've also been an angel investor and explored/studied the VC career path for a while.
— Daniel Tenner (swombat.eth) (@swombat) February 5, 2022
I'm familiar with shares fundraising.
And the model does work well enough, but it is heavily tilted to favour investors, for a simple reason:
— Daniel Tenner (swombat.eth) (@swombat) February 5, 2022
The moment you sell even one share to an external investor, it's no longer _your_ business. You now have fiduciary duty towards other investors. It's become a different beast.
This transformation of the nature of your business cannot be overstated. It's a huge deal. I know many entrepreneurs who are really working for themselves, but also many others who, whilst being founders, are basically locked into working for someone else.
— Daniel Tenner (swombat.eth) (@swombat) February 5, 2022
Not too long ago I was speaking to someone who's built a successful business that employs 50 ppl profitably. They are making alright money from it, but because it's hard to sell the biz, they feel trapped. In their own business! So they're doing NFT projects as a way to get out.
— Daniel Tenner (swombat.eth) (@swombat) February 5, 2022
Imagine taking a side job to escape a business that you yourself founded!!
— Daniel Tenner (swombat.eth) (@swombat) February 5, 2022
This is the trap that founders can fall into when they sell shares.
It's a pretty shitty trap. It's been unavoidable if you wanted to raise money though.
Until now.
PS: Of course there are high profile exceptions of founders like Zuckerberg or Page&Brin or even Jobs who wrested control of their own companies back away from investors, or managed to just keep it. They are the exception though. And even they have serious limitations.
— Daniel Tenner (swombat.eth) (@swombat) February 5, 2022
Outside of those few exceptions, though, the startup space is also rife with stories of VCs pushing founders into outcomes that are sub-optimal for the founders (and often for the employees with stock options) but help out the VCs portfolio accounting.
— Daniel Tenner (swombat.eth) (@swombat) February 5, 2022
As I explored in a previous thread, I believe NFTs will replace shares in the next 5 years: https://t.co/mKivobAhS3
— Daniel Tenner (swombat.eth) (@swombat) February 5, 2022
In that thread, I alluded to various ways to share value with investors but didn't dig into them. I will do this today.
The reason why those methods are important, though, is because of the aforementioned shitty trap.
— Daniel Tenner (swombat.eth) (@swombat) February 5, 2022
Startup advice often includes an admonition to only sell shares when you absolutely have to, because though they are "free", they are very costly.
So the context for innovating in ways to share value with investors is to avoid that huge cost of selling out your company and losing control so long before you should.
— Daniel Tenner (swombat.eth) (@swombat) February 5, 2022
So how else can we founders share growth with investors without selling equity?
We'll look at 5 models.
✨
— Daniel Tenner (swombat.eth) (@swombat) February 5, 2022
Btw, if you like this thread, pls RT tweets that you like, that's all I ask in return. And you can find more like it at https://t.co/X91GS2YlJN .
✨
The first model is the club model. I've spoken about it enough so it's not worth going into too much detail, other than to emphasise that it is a very powerful model if the business supports it. See these threads for more detail:https://t.co/kzuL1oQpmEhttps://t.co/q1lKcNuau6
— Daniel Tenner (swombat.eth) (@swombat) February 5, 2022
The club model is very effective when it makes sense to have a community around your business. That makes sense for businesses where what you're selling is something inter-personal, between people. A brand. A movement. A sense of belonging. Some kind of collaborative endeavour.
— Daniel Tenner (swombat.eth) (@swombat) February 5, 2022
In order for this club dynamic to work for fundraising, the club membership needs to become more valuable as time passes, otherwise investors will be left underwater - or, if they smart, they won't invest at all.
— Daniel Tenner (swombat.eth) (@swombat) February 5, 2022
So the club needs to benefit from some kind of network effect where the more the business succeeds, the more valuable the club membership becomes.
— Daniel Tenner (swombat.eth) (@swombat) February 5, 2022
If you pick this mechanic, try to make it obvious to investors why the club membership will appreciate over time.
In NFT fundraising, your investors are also your customers. That's especially true for club fundraising.
— Daniel Tenner (swombat.eth) (@swombat) February 5, 2022
It doesn't make much sense to adopt the club dynamic when there is no reason for your customers to talk to each other.
Even if you do set out to make a club with a good Discord and some decent community management, if there's no good reason for your customers to get together, you'll be rowing against the current and making things harder on yourself. The value won't build up over time.
— Daniel Tenner (swombat.eth) (@swombat) February 5, 2022
So what if that's your situation?
— Daniel Tenner (swombat.eth) (@swombat) February 5, 2022
How about model 2: the founder membership token.
In this model, which is used by many tools for NFT traders and investors, you buy a token and it gives the holder access to the tool.
For a tool that eventually will be subscription-based, this is pretty cool.
— Daniel Tenner (swombat.eth) (@swombat) February 5, 2022
People have been doing this without NFTs of course. I have bought a few lifetime memberships to projets I wanted to support in my time.
What remains of them? nothing.
The projects might still be going, but I'm not using them anymore, and so the money I spent has been basically wasted. It would have been much more favourable for me as an investor to have a token that I could later trade if I no longer needed that founder membership.
— Daniel Tenner (swombat.eth) (@swombat) February 5, 2022
The advantage for the project founder in such a case is that it's easier to sell the founder memberships. How much easier?
— Daniel Tenner (swombat.eth) (@swombat) February 5, 2022
Well, I just bought 10 of these for @FlooredApe. If it had been without NFTs, I would only have bought 1. So founders can raise more.
Why did I buy 10? Because I think eventually they'll be worth more than their mint price. I believe in the team and so I'm willing to take the risk to back them for 0.2 eth and see what they do with it.
— Daniel Tenner (swombat.eth) (@swombat) February 5, 2022
It's a win-win fundraising for SaaS. FlooredApe kept all their equity, too.
What if those models don't work for your project? Here's a third model: the NFT has some kind of utility in some sort of "universe" that is being created by the project.
— Daniel Tenner (swombat.eth) (@swombat) February 5, 2022
This seems, currently, particularly applicable to fundraising for games.
In those, at the moment, you might buy a character, or items, or land, or something that will be useful in the game and confer special privileges once the game is developed.
— Daniel Tenner (swombat.eth) (@swombat) February 5, 2022
It's a gamble on the game of course: if the game is unsuccessful, the NFT will likely be worthless.
But that's no different from any other kind of investment. Actually, it's substantially better.
— Daniel Tenner (swombat.eth) (@swombat) February 5, 2022
If I buy shares in Web3 Loot Ltd and they make a somewhat popular game but it doesn't make enough of a profit and they wind down, despite that success, I'll be losing all my £££.
If I buy NFTs for their future game, and they manage to make it a somewhat popular game but it doesn't make enough of a profit and they wind down, I might still have been able to sell some of those items to ppl who wanted to enjoy them in-game while it was popular.
— Daniel Tenner (swombat.eth) (@swombat) February 5, 2022
Even if I don't get to sell them - they could still have some value elsewhere. Maybe someone else makes a derivative game that reuses the NFTs, if they've been well designed. Maybe they become collectible. Either way I've got something worth more than a dead share certificate.
— Daniel Tenner (swombat.eth) (@swombat) February 5, 2022
For this to work well, imho, the NFT should be designed in such a way that it is likely to become more precious over time (to maximise the potential upside), and for maximum composability (to minimise the downside if the project dies).
— Daniel Tenner (swombat.eth) (@swombat) February 5, 2022
This latter bit is not something that's being done yet... but it should be. Your company might die some day - probably will - and I'm giving you money now. I'd appreciate if you gave me something that has at least the theoretical potential to outlast your company. Just in case.
— Daniel Tenner (swombat.eth) (@swombat) February 5, 2022
Three models.
— Daniel Tenner (swombat.eth) (@swombat) February 5, 2022
We must be running out right? Not yet. Fourth model: the NFT is tied to some kind of creative property that's being developed. The classic example would be if you bought NFTs of "characters from magical Britain" to help fund JK Rowling's first book.
All 10k of those, if they existed, would now be worth a small fortune. Those that ended up in the books would probably be worth millions to the right collector. Even others would be worth a pretty penny, considering how much HP merch sells every day.
— Daniel Tenner (swombat.eth) (@swombat) February 5, 2022
For this model to work, there must be some sort of IP being built that could eventually "go big". Fictional universes are the obvious example, but there might be others. And there are definitely cases where it does NOT make any sense.
— Daniel Tenner (swombat.eth) (@swombat) February 5, 2022
Taking @FlooredApe as an example again, they are building a portfolio mgt tool. Yes, they could graft on a fictional universe, but... perhaps that's not the best model in this case? It is a distraction that takes a fair bit of effort and may not be worth the benefit.
— Daniel Tenner (swombat.eth) (@swombat) February 5, 2022
And more importantly, unless they really work hard to make the IP successful, the collectibles are very unlikely to become worth much more than they are now. Better to focus on that 2nd model, with the membership token.
— Daniel Tenner (swombat.eth) (@swombat) February 5, 2022
Let's have one last model to close this thread: NFT as part of the core mechanic.
— Daniel Tenner (swombat.eth) (@swombat) February 5, 2022
In a way this is the meta model, since all the others could be explained as part of this model if you squint the right way.
An important note here: when deciding whether to buy a token, fungible or not, I often ask myself, are there good reasons why the token would go up in value, and are those reasons aligned or in contradiction with the usefulness of the project?
— Daniel Tenner (swombat.eth) (@swombat) February 5, 2022
Let's break this down a bit. Axie is my favourite example of how to do it badly, here.
— Daniel Tenner (swombat.eth) (@swombat) February 5, 2022
Axie Infinity requires you to buy Axies to have them fight with other Axies. There's a limited number of Axies that only grows so fast, so if demand goes up, price will follow.
So far so good. The item is used in the core mechanic of the project in a way that's likely to drive its value up.
— Daniel Tenner (swombat.eth) (@swombat) February 5, 2022
But... and this is a big one... but if the price of Axies goes up, the game becomes less and less attractive.
At one point, buying an Axie cost upwards of $300 - for a very basic one. And you needed 3 to get playing. So over $1k to just be able to play!
— Daniel Tenner (swombat.eth) (@swombat) February 5, 2022
Axie is not a very complicated game. As a game (rather than as a casino) competes squarely with games that are FREE to play.
I saw that back then and so I didn't buy any Axies (thankfully... when I was looking at it was the market top I think!!) because the economics could only make sense with a hefty injection of ponzi speculation. As a game, it didn't make any sense for someone to pay $1k to play it.
— Daniel Tenner (swombat.eth) (@swombat) February 5, 2022
So, to summarise, what you want for this fifth model is a model where the NFT will be part of the core mechanic of the project, which, as the project gets more use, should make it more precious.
— Daniel Tenner (swombat.eth) (@swombat) February 5, 2022
AND, it needs to not make the project unviable as it goes up in price.
An example that's likely to work out better is @Meta_Angels' upcoming "wishing well" mechanic, where Meta Angel holders can express wishes and other holders can help them out. (Discl: I'll be minting this project and have advised the team)
— Daniel Tenner (swombat.eth) (@swombat) February 5, 2022
If the @meta_angels team executes this well, and the "helping" behaviour does work better in this project than in others, then the value of the angels will go up.
— Daniel Tenner (swombat.eth) (@swombat) February 5, 2022
And, with a loaning mechanic they're pioneering, they have found a way to not make the price rise counterproductive.
So even as the Meta Angels drift out of reach of people who could use help - and whom the holders want to help out - it will still be possible for those people to gain access to the project. https://t.co/4Y5TeGpgMi
— Daniel Tenner (swombat.eth) (@swombat) February 5, 2022
It's not a perfect solution, and no doubt there will be many iterations before this core mechanic is perfected, but it's an example of the NFT being part of the core mechanic of the project, so I hope it's helpful in the context of this thread.
— Daniel Tenner (swombat.eth) (@swombat) February 5, 2022
So, to summarise, we've covered 5 models for NFTs to displace shares:
— Daniel Tenner (swombat.eth) (@swombat) February 5, 2022
1) club model
2) founding membership
3) utility in universe-to-come
4) link to IP being developed
5) use in core project mechanic
There are no doubt many more to come. This is not an exhaustive list.
We're still so early - I expect this list to be 50 or more items long by the end of the year. And for each item that goes on this list, that's one less reason for founders to sell part of their business for seed money.
— Daniel Tenner (swombat.eth) (@swombat) February 5, 2022
And of course, successful projects will never be so neat as to stick exactly to one of the categories that I've defined. BAYC basically dabbles in all 5 of the categories, for example. That's cool - those are not rigid categories, just starting points for ideation.
— Daniel Tenner (swombat.eth) (@swombat) February 5, 2022
And a huge benefit of these creative models for sharing value with investors is: they are not securities.
— Daniel Tenner (swombat.eth) (@swombat) February 5, 2022
So they don't need to follow pesky securities law or risk landing the founders in trouble, like a 1:1 mapping of NFTs to equity would.
So here's to the bright future where founders get to keep their equity, investors don't have to be wealthy already to support new projects, and a million innovative projects bloom.
— Daniel Tenner (swombat.eth) (@swombat) February 5, 2022
gmaen & gl ✨
PS: If you enjoyed this thread, please show your thanks by RTing it :-) You can start with the first tweet: https://t.co/D1dUi8BVvL
— Daniel Tenner (swombat.eth) (@swombat) February 5, 2022
- and you can find more threads like this at https://t.co/X91GS2YlJN