Follow me on Twitter: @ShortsHoward
I. Brand Equity
In 2012, I began wearing SpaceX and Tesla polos. To work. Bouldering. Running around the Central Park Reservoir.
I was an unpaid moving billboard for visions I wholly supported.
There are many companies that have intense, passionate supporters, even if they aren’t necessarily customers, who believe viscerally in the vision. This is especially the case with consumer products companies. Tesla, a +$1 trillion market cap company, has a $0 advertising budget and the most amazing fan club. Xiaomi, one of the top phone makers in the world with +$50 billion of revenue, allows users or “Mi Fans” to participate in product development and contribute to the ecosystem.
The first stock I ever bought, and which I still own, is Berkshire Hathaway. Berkshire is run by the most successful value investor, Warren Buffett, someone who intimately understands consumer brands, loyalty, and engagement. All the major brands that Berkshire owns are instantly recognizable and evoke immediately a feeling, sentiment, understanding:
Brands are among the most valuable financial assets of modern corporations. Innovation is another. Both are intangible but successful modern companies, and individuals, tirelessly invest in both. We are seeing this with NFTs and web3:
According to Richerd: “My identity along with the identity of other iconic Punks and apes have value beyond the NFT itself. We have our own brands similar to any other brand and that has value. Because I value my personal brand and identity, this was an easy rejection for me.”
In unpacking that intangible value, if Richerd, or Apple for that matter, were to sell their brand to a porn website or something of ill repute, it would be extraordinarily damaging. Your brand is intimately tied to your reputation:
"It takes 20 years to build a reputation and five minutes to ruin it. If you think about that, you'll do things differently." -Warren Buffett
So brands are one of the most important aspects I look for in NFT projects. Can this become a billion $ brand? Can the artist/creator develop an authentic brand?
II. Fashion Analogy and Pak’s Definition of Value
As a Pak collector, I have frequently thought about where NFT value comes from (1-5 is from Pak):
Scarcity (land grab)
Ownership (identity/brand)
Influence (social media/marketing)
Hype (WallStreetBets/Gamestop)
Fungibility (Pak NFTs only, for now)
Innovation
For example, Pak is adept at creating scarcity for their works, which drives their NFTs into real owners/collectors. However, Pak’s works, say from The Fungible, in terms of influence or hype is less pronounced in contributing to their value.
Nevertheless, this is a good start for defining value. One of the best analogies I have heard of is to think of NFTs as less art and more like fashion — grass-roots adoption, niche communities and subcultures allowing for mixing and matching.
Once you have a nice Gucci bag or a wardrobe of summer clothing, you decide what is to be worn. What goes well with what.
Doesn’t this remind you of some NFT projects…
Creative projects like Loot, purposeful token airdrops, staking/earning yield, gaming/Axie scholarships, etc. demonstrate the extraordinary power of composability: powerful mechanisms can be selected and assembled to satisfy specific purposes. Think about a powerful battery, 4 wheels, and a smartphone OS together. That’s a Tesla.
The offline example of fashion goes beyond its raw utility and into true ownership, hype, identity, and brands.
Other NFT projects that push the medium, like Andrew Cronje’s on-chain RPG Rarity Game, will create new forms of interest, use cases, and user subcultures.
III. NFT Investment: Venture/Growth Equity Approach
NFTs have allowed the average retail buyer to obtain venture capital-like returns. In short, a lot of ordinary people have gotten mad rich without special access to the hottest startups. But just as you can see in the VC returns chart, more than 64% of companies that received financings did not hold value (1x = cost). With NFT projects, the ability to hold value is substantially (maybe 10x) less.
Many NFT projects will fail and hold no value in the long term because they relied too much on hype without actually building a strong base of loyal supporters. Projects that sweep their own floors, because the price has gone down quickly, are one indication of eventual demise.
Returning to our themes of brand and innovation earlier:
Warren Buffett: “I look for economic castles protected by unbreachable 'moats'”
Elon Musk: “What matters is the pace of innovation — that is the fundamental determinant of competitiveness.”
The above is a good way to think about NFT projects if you have familiarity with stocks, companies, and shareholders. Many of these analogies, while not perfect, are directionally right.
What I look for and focus on:
Blue-chip artists/creators (could be traditional artists entering NFTs)
Well-funded teams who are in it for the long haul
Strong, purposeful engagement
Smart (and passionate) collector base
Constantly innovating in the space and cryptonative
Well-connected to platforms and other artists
A16z: understanding of “Web3.0, the internet owned by the builders and users, orchestrated with tokens”
The number of Discord and Twitter followers is by itself meaningless because many followers are adept mouse clickers or stale. I measure my own Twitter/Discord numbers by the engagement rate, for example, which is the Total Engagement divided by Impressions (how many people saw it). It doens’t matter if you have 10k followers if you get fewer likes/engagement than someone with 100 followers.
Many NFT projects will fail and hold no value in the long term because they relied too much on hype without actually having a strong base of loyal, real supporters. Projects that sweep their own floors, which in almost all cases is a bad idea and has no effect, is one indication of misuse of funds.
As a well known value investor has said, if you focus on risk the returns will come. Relying on the greater fool theory of being able to flip/offload to a bag holder on the secondary isn’t going to always work (and it might mess up your sleep).
IV. Analyzing Large Edition NFTs
This is a nice graphic that illustrates some of the value dynamics and metrics:
One of the nicest things about NFT projects is their transparency — you can see how previous collectors participate in future collections. For example, with Pak The Fungible there are:
1027 wallets with Cubes (source)
697 of those wallets hold Lost Poets Pages or Poets NFTs (68% participation)
Out of the 697 wallets, 668 wallets hold more Lost Poets NFTs than Cube NFTs (96%) while only 3 wallets hold more Cubes than Lost Poets (26 hold the same number of NFTs from both collections)
NFT projects lend themselves very well to e-commerce like customer cohort analysis and metrics. You want buyers to come back and many quantifiable metrics related to engagement and customer behavior are readily accessible from the blockchain. You can also easily see how much owners of well known NFT collections have in yours:
I plan on discussing these fun topics in more depth and hope you found it useful.
Follow me on Twitter: @ShortsHoward
Thank you Mr. ShortsHoward. I really enjoy these posts. As we postpone the launch of of our own project to further develop our community (and await more concrete direction from the market) this analysis is especially helpful as our background is that of advertising and mainstream story tellers, but also Instagram community builders. We're slowly learning how to marry the two in this quickly evolving space. Nobody wants to be the pets.com of the NFT space.
Brilliant, really enjoyed reading this. I'm looking forward to seeing a second phase in the NFT space where 99% of the current projects have failed - I don't mean that in a sardonic way, but just in an evolutionary sense. You are right when you say that "Many NFT projects will fail and hold no value in the long term because they relied too much on hype without actually building a strong base of loyal supporters." I guess what I find most exciting is not necessarily where the $/E values of the successful projects go, but the strength of those communities which have formed in successful projects over the longer term. Cryptopunks is probably as close to an example as you have of that right now.