Pengzou

NFT Projects Business Models

May 19th, 2023

And how they can translate into value for collectors

 

I invest in NFTs as I would invest in start-ups. Doing a complete due diligence is essential to know where you put your feet in. Feel free to first have a deeper look at the framework I use to assess NFT projects in my previous article: Web3 Communities: from myth to reality

Long story short, I only invest in a project if I believe in the Vision & in the Founder’s talents to execute on it, to build a strong brand around appealing Content, if I resonate & identify with the Art and the Brand Values, and if I am convinced the Benefits are enticing enough for Collectors to hold their NFTs.

 

Beyond those foundations, I am looking to understand a project’s Business Model, or how it aims to:

    1. Bring value to the space… and hopefully new eyes to it 
    2. Generate sustainable revenues & profitable growth in the long run
    3. Align incentives with holders and deliver value for them

 

Introduction: farming royalties is not a business model

Before we jump in, let’s all agree on one thing: royalties ARE NOT a sustainable business model.

First, the collector would actually be their only source of income.  

Second, it gives an incentive to the project to manipulate Floor Price fluctuations to farm royalties. Many projects ride the Ponzinomics scheme by introducing a first collection, providing an SPL token, then a second collection, then a burn mechanism to reduce supply. The objective is to trigger volume and keep collectors engaged as their dopamine gets nourished. 

And lastly, recent history showed marketplaces would do anything to attract a fraction of volume, including denying a side income of their main suppliers: creators & projects. 

 

To be sustainable, projects need recurrent sources of income. Let’s dive into the main models existing today, and the key features I’m evaluating before investing.

Note: the NFT ecosystem is still in its infancy. New Business Models will be invented, tested and tweaked by founders. My aim in this article is to highlight the most common models existing today. It will most likely be updated in the upcoming months

 

1. Digital Collectibles

Digital Collectibles are the most primary form of business models in the NFT space. 

As a technology, NFTs created a unique opportunity for artists to reach a worldwide audience while avoiding the traditional barriers to entry: getting curated in galleries or shipping artworks worldwide. 

The model is straightforward:

Create a digital artwork ⇢ mint it as an NFT ⇢ sell it as a 1:1, a series or an open edition ⇢ repeat.

And the main challenge for artists is to optimize Supply & Demand:

 

  1. Supply: carefully manage the releases’ quantity & frequency to create scarcity. The artist shall resist the temptation to drop too many artworks at once. If all collectors manage to get their piece, their appetite will be satisfied and FOMO will dry out. 
  2. Demand: grow the artist’s personal brand through social media to maximize reach & desirability.

Offering additional perks such as token gated community access (direct line with the artist, exclusive or educational content), whitelist for future releases or privileged access to IRL events can also drive incremental demand.

Also, let’s not deny the importance of network effects. If an artist gets curated by influential art collectors, it will undoubtedly drive eyes – therefore demand – on his portfolio.

Finally, we have also seen a good many brands launching their own version of Digital Collectibles. And most of them failed as either the artwork would lack authenticity or the benefits (utilities) would not be valuable enough for Collectors & Brand Lovers. 

For brands selling Digital Collectibles purely, the model is yet to be defined. 

 

2. Phygital Collectibles

On the other hand, some brands jumped on the bandwagon after the 2021 bullrun and created innovative consumer experiences for their Brand Lovers with Phygital Collectibles: or the promise for an exclusive limited edition physical good attached to a Digital Asset. 

The model is as follows:

Mint an NFT collection ⇢ collect consumer data ⇢ redeem NFT ⇢ deliver the products.

 

By escence, the Phygital Collectibles business model has a short lifespan. Once the NFTs have been redeemed, the opportunity to engage with the community are lessened. 

Still, this model is probably the most efficient today for brands willing to enter the web3 space. Offering exclusive limited edition items allows brands to offer a Unique Selling Proposition for Collectors. Yet it doesn’t come without risks.

The barriers to entry for both new collectors & IRL brands are still strong. It is therefore no surprise that most successful Phygital Collectible Collections were launched in partnership with web3 bluechip projects: Adidas with BAYC, Tiffany with Cryptopunks for example. This allows Brands to broaden their potential target audience to Crypto natives, and benefit from the web3 team’s expertise in web3.

 

3. Start-ups

My thesis when I started investing in NFTs on Solana has always been centered around projects that I would identify as potential start-ups in the making: the Builders. 

My goal is to bet on teams with an ambitious vision for the space and who aim to address major pain points with the products or services they are building.

The key question is: How do they plan to market these products to (1) generate value (profits) while (2) having incentives aligned with their holders.

 

Let’s start with the basics.

Simply put, once funds have been raised, the main challenge for any project is to start generating more income than its operating expenses before the end of their runway. 

It’s important to highlight it is not uncommon for startups to proceed with multiple fund raises before they actually become profitable at scale. 

Similarly, web3 projects may proceed with multiple mints. However, I would only consider them if they already have a proven track record, a working product / service and if I have the conviction that they are capable of becoming profitable & sustainable.

As we won’t have access to detailed financial data in most cases, I’m mostly doing a qualitative assessment of the business model’s feasibility while running some rough estimations with the data that’s available on chain.

 

a. B2B: Business to Business

The first type of business models we commonly see are projects building value-added services for other projects.

Those projects usually bet on the long term growth of the ecosystem, and most often offer a complementary set of services which are not part of their clients’ core value proposition, yet essential to operate in the NFT space. 

 

The most common services are:

This list is self-explanatory. Competition is fierce, and the amount of projects launching &/or generating sustainable revenues is still limited. Capturing & securing a dominant market share while innovating is the name of the game. And those projects basically rely on other web3 projects, and therefore the whole space, being successfull. 

 

In terms of business models, detailed information is scarce, yet we could simplify & summarize as follows:

  • Pre-mint services: a one-off fee negotiated upfront and which can have multiple layers: fixed fee in USD, % mint funds, WL allocations,… 
  • Post-mint services: a subscription model (weekly or monthly fee) to allow unlimited usage of the tools while retaining customers

 

From a holder’s perspective, which are the potential benefits?

First, let’s address the passive income meta where projects claim they will redistribute a share of their revenues to their holders. Here are some quick math with a few assumptions:

  • Collection of 5K NFTs – let’s be conservative 
  • Monthly revenues: $1 million – very ambitious for a web3 project, isn’t it?
  • Rev. Share: 10% – I know many projects claim to offer more, yet still have my doubts on its sustainability.

The monthly rev. share for holding 1 NFT would be $20. Generational wealth anyone?

 

One of the main challenges for B2B projects is to align their business model with the interest of the holders. And it mostly relies on the kind of services they offer. Examples would be: free mints (mostly through launchpads), buying pressure & use cases for the SPL token, extra whitelist spots,…

 

b. B2C: Business To Consumer

The second type of business model is projects targeting the end consumer. They develop products, services or games for individuals to use or play.

In the NFT space today, those projects can be categorized under 3 main value propositions: 

In most cases, holding the NFT would allow the user to access & use the service, platform or game for free, while non-holders would either have to pay a fee each time they use it (whether it’s using the SPL token or any cryptocurrency), or pay a subscription.

The challenge here is to assess whether there will be sufficient external demand willing to pay to make the project profitable & sustainable.

While lacking details about most projects’ financials, we can still make rough estimations of the magnitudes based on the price (fee or subscription) & elaborate scenarios on the number of paid consumers to reach certain threshold of revenues.

 

 

4. IP Decentralized brand

Building an IP franchise is a totally different beast. The Vision is to create Love Characters that the consumers know and become deeply attached to. And from there, the potential in terms of Product Diversification is huge, almost limitless. 

Did you know that the first source of revenue of Pokemon or Star Wars were actually Merch?

When you hear projects such as Pudgy Penguins, Okay Bears, Claynosaurz or Y00ts claim they want to build an IP, this is essentially the ambition they have, adding an additional layer where the NFT would become the ultimate level of expression for the brand. 

 

How does this play out? 

The name of the game is Brand Equity, and it all starts with:

  • Brand Awareness: building a strong base of consumers who are familiar with the brand and its products or services
  • Brand Engagement: create meaningful experiences for consumers to connect & interact with the Brand so that they ended up buying Brand Products

 

To build their Brand, web3 projects have taken different routes: 

  • Pudgy Penguins through a masterclass in social media presence & content creation (Instagram, GIF, meme creator), consumer goods (Toys) & empowering NFT holders to license their NFT’s IP (Brand Guidelines & Playbook, project overpass)
  • Okay Bears through product partnerships with mainstream retailers, global brands & charities
  • Y00ts through web3 partnerships with mainstream brands, helping their onboarding as an incubator
  • Claynosaurz through their animation studio

However, they all share the same ambition: reach & engage the masses and onboard them on a complete Consumer Journey. 

 

With the growth of Brand Awareness & Engagement, the base layer of potential consumers increases: more individuals are aware of the brand, develop an emotional attachment with the character and engage with its content. The funnel starts to operate. More consumers buy the products, and more become Brand Lovers.

And this is where the magic happens in web3. As the number of NFTs in the collection(s) is capped, the buying pressure increases.

Why? Supply & Demand, but not only. 

Web3 IP projects also grant the Collectors with the IP rights for commercial usage of their Digital Assets. Holders now not only have the opportunity to hold a Digital Asset of their favorite brand, but they can also make money from it.

 

Indeed, collectors can leverage the mass appeal of the Love Character in order to:

  1. Collect a portion of the royalties whenever their NFT is licensed
  2. Use their NFT’s IP to create products & contents to generate revenues with their own ventures

It is yet too early to conclude on the best path to success: it will strongly depend on the mass appeal of the Love Character, the quality of the execution of the consumer experiences, the appeal of the goods & services potential consumer would buy, and last but not least the strength & commitment of the Community to contribute in the overall growth of the Brand’s Equity.

What is sure however is that building such an IP franchise doesn’t happen overnight. Those investing in IP projects shall know this is a LONG TERM play. It is not just about shipping amazing content & products that will break the internet of Crypto Twitter, it is about creating a sustainable emotional bond between the Love Character & the masses, those that are completely agnostic about blockchains and most probably don’t want to hear about NFTs… today!

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