Leveraging NFTs as Seed Capital

NFTs have been filling the headlines for almost two years now. And this year (2021), it seems that the pace is ramping up.

Now, even the not so tech-savvy artists and crypto/blockchain enthusiasts are slowly joining the NFTs fandom. NFT Trading Volume Surges 700% to $10.7B in Q3. Those numbers are impressive. The record-breaking month was August, where we can observe just over $5 billion in trades.

As more and more celebrities put their names on NFT projects, this attracts a lot of social and news coverage. The news about NFTs is emerging in communities that are not part of the traditional crypto/blockchain world.

This is a good thing. We could interpret this signal as a move up the technology adoption curve for NFTs, positioning us directly at the start of the early adopter's phase, meaning that we are moving from the innovator's phase into the next wave of adoption. The early adopter's phase is opening the NFT space to a brand new pool of potential users.

And there are good indicators that the adoption slope for NFTs will be steeper than the bitcoin/blockchain slope, which means that NFTs have the potential to have a faster adoption rate than blockchain had.

NFT - current state — Bored Apes, CryptoPunks, StonerCats and more

NFTs are not just about funky art, collectables and music. NFTs are way more than that. Slowly the first wave of NFTs (art collections and other collectables) will start to stabilize, and the number of new projects will (probably) decrease. Additional use cases will step into the spotlight, and those projects will potentially be more stable and add more value to the whole ecosystem.

Let's briefly review a couple of use cases that have been gaining popularity in the past few months.

The gaming industry. The gaming industry is steadily gaining popularity and is responsible for a big chunk of August's NFTs market growth. The gaming industry has many potentials, and the way they are leveraging NFTs makes much sense, but this is a topic for another blog post.

The second and also fascinating use case is actually from Hollywood. The first pilot project launched this summer, and it pulled $8M in NFT sales at launch. I'm referring to the "Stoner Cats" project crafted by Mila Kunis and her team. "Stoner Cats" is a short adult animated series that allows its fans (NFT owners) to watch the episodes and also restricts access to any outsiders that don't own the "Stoner Cats" NFT.

Owning an NFT gives you also the power to participate with the creative content team directly. Making the "Stoner Cats" a (first?) DAO studio. With that (DAO), the team is trying to decentralize entertainment, introducing decentralized governance and community-driven content creation. Based on my research, the only community-driven feature of the DAO is the decentralized voting system. They are partnering with finance.vote platform, which offers DAO enabled community voting capabilities. As with all such endeavours, you need to gradually introduce new concepts and add new features when the need arises. If you want to read more about Hollywood and some good concepts, I encourage you to read this (comprehensive) article.

TL;DR; Time! — What is a DAO?

DAO stands for "Decentralized Autonomous Organization". This means that a single entity or institution does not control the organization. Instead, the ownership is distributed among the investors (token holders). The organization is governed by code (smart contracts) instead of people. The DAO has a bunch of hard-coded rules that are driving the organization. Such organizations are more transparent, open access (own a token — you can participate), and more democratic.

But why NFTs? Why not raise capital more traditionally? With the NFTs approach, the team solved a problem they had for over a year. They were having a hard time launching the project as the "traditional" Hollywood was not approving the show. With NFTs, they could bypass the traditional gatekeepers (big studios and networks) and raise enough capital to do a couple of episodes. They are entirely bypassing the middle man.

They could bring Hollywood/Entertainment, Crypto & Software worlds together. Moving focuses on the fans and making it fan-driven instead of studio-driven.

If you want to read more about the story behind Stoner Cats," I highly recommend you listen to this podcast.

NFTs as Seed Capital

The "Stoner Cats" project got me thinking. Can we use NFTs for more than just buying JPG art and other collectables? Could we take the principle from "Stoner Cats" and apply it to a SaaS venture? How would that work out? Is a newer and more bold way of funding your SaaS emerging? Could the NFTs be a complementary system to the traditional forms of venture funding? All those questions kept me up at night — well, not really, but all those are great questions.

To better explain and visualize what I'm trying to convey, let's go through the funding with the NFTs option with the help of a hypothetical SaaS company.

Imagine that you own a SaaS company. The company works in the medical field and uses machine learning to predict and classify outcomes from pictures taken with a mobile phone. You just launched and have a small community of early fans. Those early fans are your day one supporters, and they believe in you and the story behind your startup.

Those early fans pay a monthly or annual subscription fee based on their package. Each package includes different levels of features and other usage restrictions and quotas. So far, so good. Standard SaaS practices.

Your users are getting the value your SaaS platform provides - when they stop paying, they lose access and the underlying value.

Now, there wouldn't presumably be any company to begin with without your early adopters. How to retain your best and most loyal customers? Give them discounts? Send them an email of appreciation? While both options are solid and will help you retain, one tactic could be even better.

You can design and launch your own set of NFTs. Make those NFTs available on an existing marketplace or build your own marketplace. Sell them and with that bring fresh seed capital into the company.

But it's way more complicated than that. Besides creating and selling the NFTs, you need to provide remarkable value to the NFT buyers. What's in it for them if they buy your NFTs?

For your company, it's clear; the company gets a (bullishly decent) amount of seed capital, but you also must provide exceptional benefits to the NFT holders.

And this is where it gets interesting. As the owner, you have many possibilities to define the benefits or perks you wish to provide to your NFTs buyers.

Remember the "Stoner Cats" from before? As a "Stoner Cat" NFT holder, you gain access to watch the show and participate (vote) in discussion with the creative team. How great is that? 

What can you provide to your early adopters?

You need to think about the benefits you wish to provide carefully. Otherwise, you are risking that the whole NFT project will fail as the potential buyers won’t see any value in buying NFTs in the first place.

In our SaaS company example, you could give NFT holders lifetime access to NFT-holders-only-features - even if they stop paying the subscription fees, they still hold access to features they get via the NFTs.

Another bonus you can offer is to raise the rate limits or other usage limitations. You could provide premium support for NFT holders.

Or in case that you are already organizing annual conferences, your NFT holders could get some perks if they attend the conference - a complimentary dinner with the founders.

The bottom line is that your early adopters are getting more value out of your SaaS than they are getting by just paying a subscription fee.

There is also a substantial secondary network effect in play. Your SaaS is not benefiting only from the initial NFT drop (the initial sales), but you are getting a share (small %) out of every transaction involving your NFTs. Likewise, your NFT holders can participate in the second-hand market and trade NFTs with each other. After five years, your SaaS joins the Unicorns Club, and the company value is now 1000X that it was in the early days. Your NFTs are now also worth X amount more.

Disclaimer: my example is totally hypothetical, and the proposed NFT privileges might be horrible examples. I encourage you to look beyond these cases and focus on the principle behind the NFTs. This opens a whole new world of possibilities.

Closing Thoughts

NFTs are a new tool that entrepreneurs can leverage to build ventures. 

Personally, I wouldn't go as far as having the entire venture funded via NFTs and become a pure DAO company. I don't believe that we are there yet, not as individuals and not even with the technology.

However, the question remains - Are NFTs a good alternative for raising initial seed capital? 

As we are just starting to see more and more interesting NFT use cases, it is still hard to say. Still, NFTs are not an entirely new concept. We see a lot of different tools and platforms that entrepreneurs already use to raise capital. The crowdfunding platforms are already an excellent substitute for traditional VC funding. 

So what stops us from running experiments like "Stoner Cats", and more importantly, what inhibits us from raising seed capital via NFTs for non-blockchain SaaS companies? Probably not much, at least from the technology perspective. NFTs are yet to take off in different spheres of business. 

I believe that the more successful projects we have, the better the general public will perceive the technology. We will also move up in the adoption curve, making technology even more approachable and sustainable.

Want to chat more about alternative funding for your startup? Get in touch at sales@dlabs.io.