Decoding The NFT Black Box
A professional investor looks at NFTs as an emerging asset class.DeFi Research
Entering the NFT space is a little like venturing out into a hurricane.
DeFi, crypto, Web3, and a slew of acronyms come at you from all sides.
What’s worse is that scammers are taking advantage of this learning curve. Cases of fake websites and malicious links that steal your secret seed phrases and drain your wallet are serious obstacles to adoption.
That being said, there is little doubt that NFTs are an emerging medium with the potential to become a global phenomenon, if they aren’t there already.
Most NFT projects are a form of crowdfunding or investment into a new type of asset in conjunction with real estate, trading cards, luxury handbags, and wine. As an investor at a venture capital firm, I’ll be drawing parallels from the traditional finance world to the metaverse in order to show you a comfortable pathway into NFT investments.
What Kind Of Investor Do You Want To Be?
The crypto and NFT space is appealing as it breaks down the barriers that traditionally prevent retail investors from accessing deals.
The most common question is: Do you want to be a flipper, essentially an NFT day trader?
If your answer is YES: The media is shining a spotlight on a demographic of successful NFT flippers. These are individuals who become millionaires overnight through getting whitelisted and cashing out via secondary sales. However, here are the parts that often get left out:
Getting whitelisted is no easy feat. Whitelisting means that you are guaranteed an NFT at the project’s mint price, typically a reward to early supporters and active community members. Unless you are lucky enough to win giveaways, the typical path is to put in long hours on Discord maintaining conversations or inviting new members. There are even cases where people pay to outsource their Discord activities in order to get whitelisted for hyped NFT projects.
The investment strategy of “spraying and praying” is often seen when capital is evergreen or abundant, which is not the case for most people. As a flipper, getting involved in each project’s community may not be an option as time is of the essence. Similar to investing in startups, the chances of failure are substantially higher if capital is the only value offered; investors who employ this strategy are banking on one or two outsized wins to make up for the losses in their portfolio.
If your aspiration is to become a full-time flipper, consider the amount of time and research you’ll need to commit to make that transition.
Curating Your Collection
If your answer is NO: NFTs have changed the game when it comes to deal sourcing and access to coveted investment opportunities. Essentially, you are investing in a long-term business that is similar to running a venture capital strategy.
Traditionally, VC firms raise money from high-net-worth individuals or institutions and use that fund to make investments in early-stage companies. This entails buying a stake in the entrepreneurs’ model and nurturing it to maturity, which typically ranges from eight to 10 years. However, with NFTs the reach of the creators’ network has expanded from their physical friend and acquaintance groups to the coverage of Discord, Twitter, and NFT marketplaces; anyone can choose to become that project’s investor by minting or buying secondaries.
Minting a project is similar to crowdsourcing a financing round. From the perspective of the creator, the goal is ultimately to raise capital.
For the investor, the question is how to sort through the noise.
Community, art, and roadmap are all common answers when you make a purchase. However, those will fizzle without a strong founder or team in place. If you compare it to an early-stage startup, the team is the strongest driving factor because they are the captains driving the vision, boosting morale, and rallying the internal and external stakeholders. If the team chooses to remain under their pseudonym, re-evaluate your risk appetite and how you weigh the product vs team.
View the NFT’s Discord channel as a data room, a space that contains relevant information for the due diligence process. Instead of financials and operating plans, you’ll get product market fit and customer service. How the team handles bots/trolls, moderates conversation, and executes on their roadmap plans BEFORE the big reveal says a lot about the likelihood for an NFT to succeed.
With this type of investment strategy, patience is key. Giving yourself a longer timeline allows you, the investor, to grow with the project and build the value of your equity.
This leads us to the next question – portfolio construction.
Is Investing In Less Really More?
The fear of missing out (FOMO) is a big driver in the NFT space. What if the projects to your left and right are the Next Big Things?
However, once you get beyond the obsession with floor prices, you may see that you can positively impact the growth of your projects instead. Compare it to a start-up’s Series A or B round. It would be extremely poor signaling to all future investors if your seed round investors try to cash out right away.
A preferred investment thesis would be to employ a concentrated portfolio approach so you can maintain active and high-touch portfolio management. This is done by spending as much time as you can building your NFT project through product suggestions, engagement on roadmap items, and educating new members.
Intuitively, with more loyal members comes better bargaining power for the project. Successful NFT roadmaps create opportunities for new member acquisition and monetization. One of the greatest roadmap playbooks was executed by Bored Ape Yacht Club (BAYC). The BAYC creators were able to give NFT holders opportunities to build out new revenue streams through resale or intellectual properties. By offering opportunities to “adopt” a dog NFT that mimics their BAYC avatar and a free digital serum that created a mutant-version of their avatar, original BAYC NFT owners were able to receive two additional NFTs by just hodling. In addition to music, coffee, and merchandise brands that several BAYC holders created using their avatars, a new perspective on how we approach creation emerged.
Focused on creating a decentralized content creation media business, Jenkins the Valet, character #1798 from BAYC, launched the Writer’s Room. After the success of Jenkins The Valet’s intellectual property, the team built a platform that allows Writer’s Room NFT holders to enjoy the same resources such as licensing characters to professionally credited authors, collaboration with content creators on various platforms, voting on creative direction, and receiving royalties on their contribution.
With intellectual property (IP) as the fundamentals of NFT, Writer’s Room has elevated IP to the level only a Web3 company can; utilizing two Decentralized Autonomous Organizations (DAO), Writer’s Room has provided an infrastructure that will allow members to collaborate, develop, pitch, and ultimately produce crypto-native intellectual property. Creators and audiences are no longer mutually exclusive and are able to participate in both making and enjoying the work they care about. You can achieve a diversified portfolio without acquiring new projects. Opportunities for NFT holders to receive passive income and new business endeavors in both the physical and digital world are reasons why holding a few projects can still allow you to be diversified in assets.
Overall, while NFTs may seem like an intimidating and bizarre concept, there are many parallels that can be drawn from the physical world that refute its farfetchedness. Similar to investing in early-stage startups, the trade-off between years of historical performance is the cost of equity; as a reward to early supporters, the cost of investing into a company is less than if you tried to buy into a Fortune 500 company, for example.
As with all pioneering movements comes a unique set of obstacles, especially education. I hope this article has provided comfort to those that are curious and eager to explore the NFT world. Additionally, I encourage those well-versed in this space to be generous with knowledge as well so acceptance can be inspired and adoption be expedited.
Tiffany Priosoetanto-Masrin is an investor at Intudo Ventures. She aims to empower people with learning as an institutional investor while drawing the nexus between Web 3 and the traditional world.