Relying on royalties to sustain a project’s runway is not sufficient during a bear market. This has forced projects to seek alternative investment funding such as venture capital (“VC”).

VC funding has ramped up, but are VC-backed projects attractive investments or do the commitments made to VCs detract from value created for NFT holders?

This article takes a closer look at the current NFT landscape and assesses whether there is an advantage in running with VC backed projects.

• Background

  • Venture Capital

  • NFT VC Landscape

• VC Backed Project Performance

• Benefits

• Drawbacks

• Impact on NFT traders

• Future Potential VC Targets

• Is VC Funding the Answer?

• Closing Remarks (TL;DR)

VC backing provides an NFT project with a certain level of validity. In a market rife with cash grabs and scams, NFT projects that have VC backing tend to attract a premium. But what is VC funding? What are the benefits and drawbacks? Is there value in holding VC backed NFT projects, or are they overpriced?

VC funding is typical of early stage startups with strong growth potential. Private equity funding tends to provide funds to more established firms with several years of sustained growth under their belt. It comes down to the risk appetite of the investor. The earlier the investment, the higher the chance of failure, though successes offer greater potential upside than later-stage investments.

Crypto and NFTs are at the forefront of technology innovation. The crypto market grew 200% in 2021, with Ethereum and Bitcoin attracting gains of 400% and 60%, respectively. These exponential gains are typical of network effects with parabolic increases stemming from being early in a protocol’s lifecycle. NFTs are no different, demonstrating a 21,000% increase from 2020. It’s therefore not surprising that it’s attracting interest from VC funds.

There are typically four rounds of VC investment at various stages of the company lifecycle, though many companies raise in perpetuity, forgoing the cost and scrutiny associated with the going public.

Series “x” (Median $ raised in the US):

• Seed round ($X) - used to establish a minimum viable product (“MVP”)

• Series A ($10 million) - Funding to scale once there’s product-market-fit.

• Series B ($26 million) - Funding to accelerate growth.

• Series C ($52.5 million) - Used to entice acquisition or public offering.

Many NFT projects that attract VC funding will be in the Seed or Series A categories, although there are some behemoths that are well beyond these levels of funding.

VC funding is typically an illiquid investment, resulting in funds being locked up until a company/project hits a certain event/milestone. Liquidation events are typically public offerings or acquisitions which can take time to occur. The main differentiation in web3 is that some projects issue tokens that can be openly traded on exchanges, thus enabling investors to recoup some of their outlay earlier than they would with web2 alternatives.

It’s estimated that there has been $7.4 billion funding from VCs in the NFT space as at Q1 2022. We can categorize the NFT market into the following seven segments (% of $7.4 billion total NFT VC funding):

• Gaming (39%)

• Collectibles (20%)

• Entertainment (10%)

• Marketplaces (10%)

• Metaverse (3%)

• Art (2%)

• Infrastructure (1%)

Arguably there’s some overlap, but this is fit for purpose as a top down view of the NFT landscape.

NFT gaming currently leads the way with $2.9 billion raised. 34% ($1 billion) of which is raised by Forte (software developer) who have partnered with Zynga to build out its blockchain gaming portfolio.

Hot on their heels are well known web3 names likeAnimoca Brands andAxie Infinity who have $577m (20%) and $311m (11%) in VC funding, respectively.

For comparability, 2022 NFT gaming VC funding was greater than the entire 2019 US Gaming VC investment ($1.6 billion).

It’s difficult to perform a same-year comparison given the overlap between NFTs and gaming. Before 2020, this was predominantly web2 gaming, exclusive of NFTs.

Deal flow has experienced a slowdown given the current market conditions. The war in Ukraine, rising interest rates and inflation concerns being the catalysts with minimal forecasted growth until there’s more certainty.

Despite this, there have been some large rounds of funding - for example, Epic Games recently raised $2 billion. We can see there’s significant investment being funneled into the web3 space, but who’s behind the funding?

Now that we’ve set the scene, how have VC backed NFT projects been performing?

In a market rife with scams and bad actors, an announcement of VC backing can be perceived favorably by the market. If you are early on the news as a trader, you can scalp reasonable profit on the collection, particularly as volume comes in.

The adverse macro conditions limit this, but there are still opportunities to be had if traders act quickly. However, you need to bear in mind the NFT will need to pump more than 10% to cover the gas, royalty and marketplace fees before a profit is made.

Foresight News performed an interesting analysis on the floor price post-announcement of six top VC backed projects. The major spikes were with VeeFriends and DigiDaigaku, which moved 40% and 200%, respectively. This could be attributed to the established leaders within the projects, as bothGaryVee andGabrielle Leydon are both well known in their industries. So it’s natural to see the market react favorably to this after an announcement of funding into projects whose leadership has established themselves. Providing funds to leaders that have a proven track record of executing on their roadmaps is bullish.

The Yuga Labs funding was led by Andreessen Horowitz’s a16z crypto fund. Other investors joining the round included Animoca Brands, LionTree, Sound Ventures, Thrive Capital, and crypto players FTX and MoonPay.

When we look at the price action of BAYC around theVC announcement,we can see a lot of sales volume pick up before it hits mainstream headlines.

For instance on March 17, ‘22 there were 142 sales of BAYC compared to a typical daily average of 10, driven by an outdated pitch deck being leaked.

The market reacted favorably, demonstrated by the continual uptrend in price and sales volume.

DigiDaigaku received $200m of funding via its parent company, Limit Break. Funds were raised from FTX_Official, @coinbase and @psumvc to build web3 games. Again, the market reacted extremely well, with the floor doubling on announcement day to more than 11Ξ.

In fact, there was a 200Ξ sale for a Mythic item in the collection two weeks ago, demonstrating the market’s bullish sentiment. The floor is currently holding up well at 10.4Ξ.

RTFKT initially raised funding of $8m USD from Andreessen Horowitz in May ‘21, long before Clone-X launched.

Clone-X minted a day prior to the Nike announcement, hitting 5,000Ξ volume on mint day which tripled to 15,000Ξ on the Nike acquisition announcement. The floor doubled to in excess of 9Ξ before rising to an all time high of 29Ξ in Feb ‘22.

The project has since been at the mercy of the adverse macro conditions, currently holding around a 9Ξ floor price, but still holding blue chip status with strongfuture prospects.

While many see the Nike acquisition as bullish, there are some that identify the conflicting interests between NFT holders and shareholders. An optimal balancing act will be needed to manage both stakeholder interests.

PROOF raised $50m in funding, led by Andreessen Horowitz (a16z), along with participation from Seven Seven Six, True Ventures, Collab+Currency, Flamingo DAO, SV Angel and VaynerFund.

It’s not surprising that the Reddit co-founder had a good understanding of NFTs given the VC funding provided to PROOF via Seven Seven Six back in April ‘22. The Reddit “digital collectibles” had been in the pipeline for a while.

The project had already received $76m from the mint in April ‘22 and generated $281m in sales to bolster its secondary sales royalties at 5% ($14m) within the first couple of days. It’s safe to say this was the most parabolic volume the NFT market had seen.

Andreessen Horowitz (a16z) provided a $50m seed round for Gary Vaynerchuk’s NFT project. The VC firm can see that creating a strong community and backing it up with unique intellectual property has great value. GaryVee, who has a long track record of success in web2, already has a strong following/community with:

• 3m followers on Twitter

• 5.4m on Facebook

• 4m on Youtube

• 10m on Instagram

• 15m on TikTok and

• 5m on Linkedin.

Holding the VeeFriends NFT provides benefits, including access to Gary in some instances. There’s a risk of centralized platforms suspending accounts, but his diversification across multiple media platforms is a masterclass in delivering content and managing risk. The alternative is a web3 decentralized platform, which could become reality with entrepreneurs like the Reddit co-founder (Alexis Ohanian) advocating for this to become a reality.

While the funding is expected to fuel the project's further expansion, it didn’t really have much of an impact on volume. With 7 sales, this was triple the usual daily volume but not a significant pump compared to other VC funding announcements.

Doodles raised $54m at a $704 million valuation. The round was led by Seven Seven Six (created by Reddit co-founder Alexis Ohanian) who also contributed to Moonbirds.

The project saw almost 100 sales post announcement, which is 10x its usual daily volume.

Although floor price didn’t really pump following the realization the announcement was already priced in from June ‘22.

So we can see the market tends to perceive VC investment favorably - but what are the benefits and drawbacks?

Many retail investors may have seen Shark Tank/Dragons’ Den. Founders will pitch their ideas to a panel of sharks/dragons (potential investors) all of which have differing expertise. They offer different levels of funding for a percentage of equity in the business. The founders may go head to head with the stronger business proposals using their experience and networks as leverage to maximize their potential equity in the venture.

For instance, a VC may have an abundance of experience with other web3 projects, or an understanding of how to maximize the value of IP. Understanding the stage of the lifecycle and how to take that project to the next level can expedite the rate of success. This can be the key ingredient to the project succeeding, minimizing execution risk and maximizing its prospects.

Leveraging a VCs network can be invaluable. There may be other investments in the same portfolio that compliment a founder’s project. Being able to tap into this network can pay dividends down the track that may have otherwise not have been possible. As an example there may be mutually beneficial arrangements that result in cost savings through related party transactions.

Many large VC funds provide a platform for a project to get recognition. There may be networking events with projects coming together in the same location. Word of mouth can spread leading to additional recognition.

Backing from some VCs could have given the perception that there is some sort of validation of that project. The more established VCs will likely have a more rigorous due diligence process, meaning a lower level of research is required to meet the same benchmark as those projects that aren’t backed by VC funding.

Many VCs will be experienced in taking ventures to the next stage in the product / company lifecycle. First time founders are unlikely to have the same level of knowledge and so will benefit from the guidance of an experienced board of directors.

Founders may give up a reasonable stake in their company. If this is above 51%, then it can lead to loss of control of the project. Ultimately the VC fund will take equity for the funding provided, which will be down to the negotiation of the founders. Even minority investments, though, come with a certain degree of lost control, because institutional capital comes along with performance expectations.

Pre-seed investments could involve funding from the founder’s own pockets or from close family or friends. At this point there is a closer alignment of values and interests, however once this funding is sourced externally, it leads to additional interests that could conflict with the interests of the NFT holder and project.

• VC investment time horizons could be short term, meaning an exit strategy could lead to liquidity extraction at some point in the near term. If the handover of equity is done with a new investor, they will also be wanting a return at some point, for which the yield will need to come from somewhere. In a consumer -riven NFT collection, the return would probably come from the holder as the end consumer.

• Whereas if the project is run in a decentralized manner, then alignment of interests could lead to lower risk of value being extracted from the project. For instance, if the holders participate in the funding through a token distribution model, then this can help maximize the long term success of a project with holders receiving benefits and participating in the governance of the project.

• If the project founder focuses purely on growing the project’s brand value and revenue, but neglects to return value to the NFT holder (e.g. through issuance of airdrops or other benefits), then the value of NFT will fall unless the increase in brand value / project revenue finds some way to accrue value to the NFTs themselves.

Having an additional investor will increase the number of communication channels. Most established VCs will require reporting on performance so that they can make business decisions. This could mean formal board reporting, which can be time consuming and extensive.

This can lead to added pressures beyond simply delivering a product. There are increased stakeholder management requirements which can detract from the focus on the development of the project. Upwards management of VC expectations and delivering against agreed milestones is necessary to avoid losing control of the NFT project as a founder.

These benefits and drawbacks have both direct and indirect impacts on the NFT holders of VC backed projects.

VCs tend to have more stringent due diligence requirements meaning that NFT traders may not need to scrutinize projects as much as those without the backing.

The project founders may need to beKYC'ed so as to be eligible for the funding. They will typically need to produce a Minimum Viable Product (“MVP”). This reduces the risk of a founder simply running off with the money or using Unity images as part of their roadmap to get funding from naive retail investors. Effectively, VCs are considered smart money that have experience with multiple prior investments and can spotred flags more easily using their experience.

NFTs tend to go through hype cycles, partly attributed to shiny object syndrome. For instance we’ve had:

• The NFT gaming “ponzinomics” in late 2021, when the new thing to do was launch a utility token. Most NFTs pumped on news a token was to be launched, despite no token sink available to burn the token.

• We’ve had free mint meta - NFT projects launched with zero mint cost meaning the early adopters made huge gains on successful projects like Goblintown.wtf

A series of cash grabs and scams saw a disgruntled NFT market steer clear of new unknown projects. Then came the VC meta - providing increased due diligence meant that any project announcing VC backing pumped hard. Investors were willing to pay a premium knowing they were unlikely to get rugged straight away. It was a safer play than the usual degen project.

But is this “premium” an overvaluation? The pump from VC announcements has somewhat faded now that the macro conditions have deteriorated. While the VC funded projects tend to do reasonably well, they aren’t striking gold off mint and now typically come with an initial premium mint cost or higher royalties to compensate. Many argue that it’s become tougher to get allowlist spots, with a large portion going to influencers to assist with marketing in return. One could argue the VC premium has now been priced into the cost of the NFTs.

Investment isn’t going to stop. A16z has raised a staggering $4.5b for its fourth fund. In May ‘22 they stated that they were setting aside $1.5b of this fund for seed investments in Web3. That’s 30 more VeeFriends investments. While there wasn’t much of a pump in price for VeeFriends funding announcement, other projects backed by a16z have done well. Similarly Paradigm has a staggering $2.5b, backing well known projects such as Art Gobblers and the trading platform, Blur. The recent airdrop benefits saw Blur volume pump significantly over recent weeks.

What do VC funds, like a16z, look for in an NFT collection? We can start by looking at its existing project involvement and see if there’s a recurring theme or projects that compliment their expertise. What do these projects have in common?

• Strong community with a working Minimum Viable Product (“MVP”)

• Focused strategic direction

• Strong growth potential

• Charismatic founders that they can rely on.

A16z could be pivoting to creating incubators to capitalize on bringing the best web3 people together to create projects and receive equity for doing so. Their recent start-up school could be an indicator of the direction they are taking. After all, why invest millions for more established projects when you can take a cut at inception? Could we see educational projects become investment targets?

Or IRL networking projects? There’s certainly an appetite for talent to enter the space and a lack of physical hubs for people to network. Most degens and builders are stereotyped as working from their parents’ basements but the truth is many are leaving their web2 or tradFi jobs for the cutting edge web3 equivalent and are seeking project collaboration work spaces to do so.

You’ll want to be keeping an eye out for projects with strong value propositions that are struggling with funding to get to the next stage in their roadmap.

Most VC funds will require a Minimum Viable Product (“MVP”). The MVP is a product with enough features to attract early-adopter customers. It validates an idea early so as to gauge the target market response and prevent significant resources from being used in case the idea flops.

So any NFT projects with a unique idea, gaining traction from a target audience could be a good target from VC funding.

We could also look at other potential VCs and how their skills compliment other emerging NFT projects.

Binance recently contributed $500m to the Twitter acquisition. Twitter has been ramping up NFT functionality and given the low VC involvement within the infrastructure segment comparably with the other six, we could see more investment flow this way.

We could see NFT projects launching novel tech that ties back to Twitter functionality. Those projects may be acquired for the IP alone. Similar to traditional web2 corporates an acquirer could target a company for its crown jewels and strip the rest of the assets.

Not all projects with additional external funding are performing well. Decentraland was observed recently having 38 daily active users despite a $1b market valuation. The project used an ICO in 2017 to gain initial funding for its expansion plans. But user retention appears to be a problem as players suffer from shiny object syndrome and direct their attention to more engaging content.

While Sandbox has slightly more users it’s still struggling to justify its lofty valuation. It too jumped on the ICO craze with its launch in Aug 2020 with the help from Binance launchpad. This was followed by a Series B raise of $93m on Nov1, ‘21 which drove the land parcels to break a 1Ξ floor and a run up to 4Ξ during the Metaverse hype period. It has now settled around a 1.3Ξ floor price.

For comparability, there are Ethereum based NFT games, scaled on Polygon, with no VC backing yet a similar number of unique active wallets/users. Are these alternatives better opportunities for traders? In the short term, probably.

Angel investing and VC funding tend to go to higher risk earlier phase companies. With this comes higher risk and higher reward. The Web2 failure rate of VC backed companies is 75%, or at least fail to return VC investors capital.

If we were to use floor price as a proxy for what the market is willing to pay for an NFT collection, then we can see that the web3 project failure rate is 99%. Jumpman performed an analysis on NFT projects, observing that only 0.58% of collections had a floor price in excess of 1 Ether.

Just because an NFT project is backed by a VC, doesn’t mean that it will be successful.

The adverse macro conditions are causing many NFT projects to suffer. Project runways are dwindling and volume is drying up meaning even the most successful project floor prices are downtrending despite positive news.

In a bull market where capital is cheap and flowing, an announcement of VC funding could pump the short term price lending it to be a viable opportunity trading the news.

Some projects with strong value propositions could be snapped up by prowling VCs at unfavorable terms as founders struggle to sustain development with lack of funding. This could lead to NFT holders receiving the raw end of the deal with the new investors maximizing their terms and returns. We’ve seen this inDefi acquisitions of failing centralized lending protocols being acquired, yet investors who have deposited their funds not receiving payouts as acquirers strip the assets and leave the debt.

• VCs are investing heavily within the web3 space. Tokenized incentives offer more liquid and profitable investment propositions to the web2 counterparts, but the sustainability of tokenized incentives is more questionable than ever.

• VC-backed projects tend to do well post announcement, so catching the news early can benefit a short term trader.

• Long-term prospects for VC-backed projects are mixed. Some sizable ventures are not performing well, and with web2 VCs experiencing a 75% failure rate, web3 is likely to be larger (less proven market with fewer paths for growth among any given project).

• We’ve already observed 99% of project floors falling below 1Ξ. Most blue chip collections have VC backing and are performing comparatively better than those that don’t.

• The increased project scrutiny and requirements means retail investors don’t have to do the same level of due diligence with the projects without VC backing. Founders tend to have to comply with KYC requirements and provide an MVP as a minimum.

• There are conflicting interests and a risk of founders losing control of their project. There could be value extraction from the ecosystem, but without the funding the project may be dead in the water and be unable to scale. A catch 2022, the lesser of two evils.

• We can use investing patterns to predict future VC targets and stay abreast of relatively established project developments. These can become prime targets.

• Some VC-backed projects are struggling to retain users, so VC funding is not always the answer. If the team is unable to execute on their roadmap, then the VC funds may not be used in the most effective manner resulting in wastage.

VC funds tend to follow the best growth opportunities - Growth industries are their bread and butter. Arguably they are smart money,but they make mistakes, evidenced by the high early failure rates in both web2/web3, and the declining user base of some VC-backed platforms. Doing your own research is always wise and can help you catch the next short-term VC announcement pump before it happens.

At OriginsNFT we leverage data-driven decision making, educational resources, and proprietary analytics to remain ahead of the curve with respect to blockchain tech and specifically NFTs. To find out more, please visit our website or Twitter.

To purchase a pass, please visit our Opensea page.

Relying on royalties to sustain a project’s runway is not sufficient during a bear market. This has forced projects to seek alternative investment funding such as venture capital (“VC”).

VC funding has ramped up, but are VC-backed projects attractive investments or do the commitments made to VCs detract from value created for NFT holders?

This article takes a closer look at the current NFT landscape and assesses whether there is an advantage in running with VC backed projects.

• Background

  • Venture Capital

  • NFT VC Landscape

• VC Backed Project Performance

• Benefits

• Drawbacks

• Impact on NFT traders

• Future Potential VC Targets

• Is VC Funding the Answer?

• Closing Remarks (TL;DR)

VC backing provides an NFT project with a certain level of validity. In a market rife with cash grabs and scams, NFT projects that have VC backing tend to attract a premium. But what is VC funding? What are the benefits and drawbacks? Is there value in holding VC backed NFT projects, or are they overpriced?

VC funding is typical of early stage startups with strong growth potential. Private equity funding tends to provide funds to more established firms with several years of sustained growth under their belt. It comes down to the risk appetite of the investor. The earlier the investment, the higher the chance of failure, though successes offer greater potential upside than later-stage investments.

Crypto and NFTs are at the forefront of technology innovation. The crypto market grew 200% in 2021, with Ethereum and Bitcoin attracting gains of 400% and 60%, respectively. These exponential gains are typical of network effects with parabolic increases stemming from being early in a protocol’s lifecycle. NFTs are no different, demonstrating a 21,000% increase from 2020. It’s therefore not surprising that it’s attracting interest from VC funds.

There are typically four rounds of VC investment at various stages of the company lifecycle, though many companies raise in perpetuity, forgoing the cost and scrutiny associated with the going public.

Series “x” (Median $ raised in the US):

• Seed round ($X) - used to establish a minimum viable product (“MVP”)

• Series A ($10 million) - Funding to scale once there’s product-market-fit.

• Series B ($26 million) - Funding to accelerate growth.

• Series C ($52.5 million) - Used to entice acquisition or public offering.

Many NFT projects that attract VC funding will be in the Seed or Series A categories, although there are some behemoths that are well beyond these levels of funding.

VC funding is typically an illiquid investment, resulting in funds being locked up until a company/project hits a certain event/milestone. Liquidation events are typically public offerings or acquisitions which can take time to occur. The main differentiation in web3 is that some projects issue tokens that can be openly traded on exchanges, thus enabling investors to recoup some of their outlay earlier than they would with web2 alternatives.

It’s estimated that there has been $7.4 billion funding from VCs in the NFT space as at Q1 2022. We can categorize the NFT market into the following seven segments (% of $7.4 billion total NFT VC funding):

• Gaming (39%)

• Collectibles (20%)

• Entertainment (10%)

• Marketplaces (10%)

• Metaverse (3%)

• Art (2%)

• Infrastructure (1%)

Arguably there’s some overlap, but this is fit for purpose as a top down view of the NFT landscape.

NFT gaming currently leads the way with $2.9 billion raised. 34% ($1 billion) of which is raised by Forte (software developer) who have partnered with Zynga to build out its blockchain gaming portfolio.

Hot on their heels are well known web3 names likeAnimoca Brands andAxie Infinity who have $577m (20%) and $311m (11%) in VC funding, respectively.

For comparability, 2022 NFT gaming VC funding was greater than the entire 2019 US Gaming VC investment ($1.6 billion).

It’s difficult to perform a same-year comparison given the overlap between NFTs and gaming. Before 2020, this was predominantly web2 gaming, exclusive of NFTs.

Deal flow has experienced a slowdown given the current market conditions. The war in Ukraine, rising interest rates and inflation concerns being the catalysts with minimal forecasted growth until there’s more certainty.

Despite this, there have been some large rounds of funding - for example, Epic Games recently raised $2 billion. We can see there’s significant investment being funneled into the web3 space, but who’s behind the funding?

Now that we’ve set the scene, how have VC backed NFT projects been performing?

In a market rife with scams and bad actors, an announcement of VC backing can be perceived favorably by the market. If you are early on the news as a trader, you can scalp reasonable profit on the collection, particularly as volume comes in.

The adverse macro conditions limit this, but there are still opportunities to be had if traders act quickly. However, you need to bear in mind the NFT will need to pump more than 10% to cover the gas, royalty and marketplace fees before a profit is made.

Foresight News performed an interesting analysis on the floor price post-announcement of six top VC backed projects. The major spikes were with VeeFriends and DigiDaigaku, which moved 40% and 200%, respectively. This could be attributed to the established leaders within the projects, as bothGaryVee andGabrielle Leydon are both well known in their industries. So it’s natural to see the market react favorably to this after an announcement of funding into projects whose leadership has established themselves. Providing funds to leaders that have a proven track record of executing on their roadmaps is bullish.

The Yuga Labs funding was led by Andreessen Horowitz’s a16z crypto fund. Other investors joining the round included Animoca Brands, LionTree, Sound Ventures, Thrive Capital, and crypto players FTX and MoonPay.

When we look at the price action of BAYC around theVC announcement,we can see a lot of sales volume pick up before it hits mainstream headlines.

For instance on March 17, ‘22 there were 142 sales of BAYC compared to a typical daily average of 10, driven by an outdated pitch deck being leaked.

The market reacted favorably, demonstrated by the continual uptrend in price and sales volume.

DigiDaigaku received $200m of funding via its parent company, Limit Break. Funds were raised from FTX_Official, @coinbase and @psumvc to build web3 games. Again, the market reacted extremely well, with the floor doubling on announcement day to more than 11Ξ.

In fact, there was a 200Ξ sale for a Mythic item in the collection two weeks ago, demonstrating the market’s bullish sentiment. The floor is currently holding up well at 10.4Ξ.

RTFKT initially raised funding of $8m USD from Andreessen Horowitz in May ‘21, long before Clone-X launched.

Clone-X minted a day prior to the Nike announcement, hitting 5,000Ξ volume on mint day which tripled to 15,000Ξ on the Nike acquisition announcement. The floor doubled to in excess of 9Ξ before rising to an all time high of 29Ξ in Feb ‘22.

The project has since been at the mercy of the adverse macro conditions, currently holding around a 9Ξ floor price, but still holding blue chip status with strongfuture prospects.

While many see the Nike acquisition as bullish, there are some that identify the conflicting interests between NFT holders and shareholders. An optimal balancing act will be needed to manage both stakeholder interests.

PROOF raised $50m in funding, led by Andreessen Horowitz (a16z), along with participation from Seven Seven Six, True Ventures, Collab+Currency, Flamingo DAO, SV Angel and VaynerFund.

It’s not surprising that the Reddit co-founder had a good understanding of NFTs given the VC funding provided to PROOF via Seven Seven Six back in April ‘22. The Reddit “digital collectibles” had been in the pipeline for a while.

The project had already received $76m from the mint in April ‘22 and generated $281m in sales to bolster its secondary sales royalties at 5% ($14m) within the first couple of days. It’s safe to say this was the most parabolic volume the NFT market had seen.

Andreessen Horowitz (a16z) provided a $50m seed round for Gary Vaynerchuk’s NFT project. The VC firm can see that creating a strong community and backing it up with unique intellectual property has great value. GaryVee, who has a long track record of success in web2, already has a strong following/community with:

• 3m followers on Twitter

• 5.4m on Facebook

• 4m on Youtube

• 10m on Instagram

• 15m on TikTok and

• 5m on Linkedin.

Holding the VeeFriends NFT provides benefits, including access to Gary in some instances. There’s a risk of centralized platforms suspending accounts, but his diversification across multiple media platforms is a masterclass in delivering content and managing risk. The alternative is a web3 decentralized platform, which could become reality with entrepreneurs like the Reddit co-founder (Alexis Ohanian) advocating for this to become a reality.

While the funding is expected to fuel the project's further expansion, it didn’t really have much of an impact on volume. With 7 sales, this was triple the usual daily volume but not a significant pump compared to other VC funding announcements.

Doodles raised $54m at a $704 million valuation. The round was led by Seven Seven Six (created by Reddit co-founder Alexis Ohanian) who also contributed to Moonbirds.

The project saw almost 100 sales post announcement, which is 10x its usual daily volume.

Although floor price didn’t really pump following the realization the announcement was already priced in from June ‘22.

So we can see the market tends to perceive VC investment favorably - but what are the benefits and drawbacks?

Many retail investors may have seen Shark Tank/Dragons’ Den. Founders will pitch their ideas to a panel of sharks/dragons (potential investors) all of which have differing expertise. They offer different levels of funding for a percentage of equity in the business. The founders may go head to head with the stronger business proposals using their experience and networks as leverage to maximize their potential equity in the venture.

For instance, a VC may have an abundance of experience with other web3 projects, or an understanding of how to maximize the value of IP. Understanding the stage of the lifecycle and how to take that project to the next level can expedite the rate of success. This can be the key ingredient to the project succeeding, minimizing execution risk and maximizing its prospects.

Leveraging a VCs network can be invaluable. There may be other investments in the same portfolio that compliment a founder’s project. Being able to tap into this network can pay dividends down the track that may have otherwise not have been possible. As an example there may be mutually beneficial arrangements that result in cost savings through related party transactions.

Many large VC funds provide a platform for a project to get recognition. There may be networking events with projects coming together in the same location. Word of mouth can spread leading to additional recognition.

Backing from some VCs could have given the perception that there is some sort of validation of that project. The more established VCs will likely have a more rigorous due diligence process, meaning a lower level of research is required to meet the same benchmark as those projects that aren’t backed by VC funding.

Many VCs will be experienced in taking ventures to the next stage in the product / company lifecycle. First time founders are unlikely to have the same level of knowledge and so will benefit from the guidance of an experienced board of directors.

Founders may give up a reasonable stake in their company. If this is above 51%, then it can lead to loss of control of the project. Ultimately the VC fund will take equity for the funding provided, which will be down to the negotiation of the founders. Even minority investments, though, come with a certain degree of lost control, because institutional capital comes along with performance expectations.

Pre-seed investments could involve funding from the founder’s own pockets or from close family or friends. At this point there is a closer alignment of values and interests, however once this funding is sourced externally, it leads to additional interests that could conflict with the interests of the NFT holder and project.

• VC investment time horizons could be short term, meaning an exit strategy could lead to liquidity extraction at some point in the near term. If the handover of equity is done with a new investor, they will also be wanting a return at some point, for which the yield will need to come from somewhere. In a consumer -riven NFT collection, the return would probably come from the holder as the end consumer.

• Whereas if the project is run in a decentralized manner, then alignment of interests could lead to lower risk of value being extracted from the project. For instance, if the holders participate in the funding through a token distribution model, then this can help maximize the long term success of a project with holders receiving benefits and participating in the governance of the project.

• If the project founder focuses purely on growing the project’s brand value and revenue, but neglects to return value to the NFT holder (e.g. through issuance of airdrops or other benefits), then the value of NFT will fall unless the increase in brand value / project revenue finds some way to accrue value to the NFTs themselves.

Having an additional investor will increase the number of communication channels. Most established VCs will require reporting on performance so that they can make business decisions. This could mean formal board reporting, which can be time consuming and extensive.

This can lead to added pressures beyond simply delivering a product. There are increased stakeholder management requirements which can detract from the focus on the development of the project. Upwards management of VC expectations and delivering against agreed milestones is necessary to avoid losing control of the NFT project as a founder.

These benefits and drawbacks have both direct and indirect impacts on the NFT holders of VC backed projects.

VCs tend to have more stringent due diligence requirements meaning that NFT traders may not need to scrutinize projects as much as those without the backing.

The project founders may need to beKYC'ed so as to be eligible for the funding. They will typically need to produce a Minimum Viable Product (“MVP”). This reduces the risk of a founder simply running off with the money or using Unity images as part of their roadmap to get funding from naive retail investors. Effectively, VCs are considered smart money that have experience with multiple prior investments and can spotred flags more easily using their experience.

NFTs tend to go through hype cycles, partly attributed to shiny object syndrome. For instance we’ve had:

• The NFT gaming “ponzinomics” in late 2021, when the new thing to do was launch a utility token. Most NFTs pumped on news a token was to be launched, despite no token sink available to burn the token.

• We’ve had free mint meta - NFT projects launched with zero mint cost meaning the early adopters made huge gains on successful projects like Goblintown.wtf

A series of cash grabs and scams saw a disgruntled NFT market steer clear of new unknown projects. Then came the VC meta - providing increased due diligence meant that any project announcing VC backing pumped hard. Investors were willing to pay a premium knowing they were unlikely to get rugged straight away. It was a safer play than the usual degen project.

But is this “premium” an overvaluation? The pump from VC announcements has somewhat faded now that the macro conditions have deteriorated. While the VC funded projects tend to do reasonably well, they aren’t striking gold off mint and now typically come with an initial premium mint cost or higher royalties to compensate. Many argue that it’s become tougher to get allowlist spots, with a large portion going to influencers to assist with marketing in return. One could argue the VC premium has now been priced into the cost of the NFTs.

Investment isn’t going to stop. A16z has raised a staggering $4.5b for its fourth fund. In May ‘22 they stated that they were setting aside $1.5b of this fund for seed investments in Web3. That’s 30 more VeeFriends investments. While there wasn’t much of a pump in price for VeeFriends funding announcement, other projects backed by a16z have done well. Similarly Paradigm has a staggering $2.5b, backing well known projects such as Art Gobblers and the trading platform, Blur. The recent airdrop benefits saw Blur volume pump significantly over recent weeks.

What do VC funds, like a16z, look for in an NFT collection? We can start by looking at its existing project involvement and see if there’s a recurring theme or projects that compliment their expertise. What do these projects have in common?

• Strong community with a working Minimum Viable Product (“MVP”)

• Focused strategic direction

• Strong growth potential

• Charismatic founders that they can rely on.

A16z could be pivoting to creating incubators to capitalize on bringing the best web3 people together to create projects and receive equity for doing so. Their recent start-up school could be an indicator of the direction they are taking. After all, why invest millions for more established projects when you can take a cut at inception? Could we see educational projects become investment targets?

Or IRL networking projects? There’s certainly an appetite for talent to enter the space and a lack of physical hubs for people to network. Most degens and builders are stereotyped as working from their parents’ basements but the truth is many are leaving their web2 or tradFi jobs for the cutting edge web3 equivalent and are seeking project collaboration work spaces to do so.

You’ll want to be keeping an eye out for projects with strong value propositions that are struggling with funding to get to the next stage in their roadmap.

Most VC funds will require a Minimum Viable Product (“MVP”). The MVP is a product with enough features to attract early-adopter customers. It validates an idea early so as to gauge the target market response and prevent significant resources from being used in case the idea flops.

So any NFT projects with a unique idea, gaining traction from a target audience could be a good target from VC funding.

We could also look at other potential VCs and how their skills compliment other emerging NFT projects.

Binance recently contributed $500m to the Twitter acquisition. Twitter has been ramping up NFT functionality and given the low VC involvement within the infrastructure segment comparably with the other six, we could see more investment flow this way.

We could see NFT projects launching novel tech that ties back to Twitter functionality. Those projects may be acquired for the IP alone. Similar to traditional web2 corporates an acquirer could target a company for its crown jewels and strip the rest of the assets.

Not all projects with additional external funding are performing well. Decentraland was observed recently having 38 daily active users despite a $1b market valuation. The project used an ICO in 2017 to gain initial funding for its expansion plans. But user retention appears to be a problem as players suffer from shiny object syndrome and direct their attention to more engaging content.

While Sandbox has slightly more users it’s still struggling to justify its lofty valuation. It too jumped on the ICO craze with its launch in Aug 2020 with the help from Binance launchpad. This was followed by a Series B raise of $93m on Nov1, ‘21 which drove the land parcels to break a 1Ξ floor and a run up to 4Ξ during the Metaverse hype period. It has now settled around a 1.3Ξ floor price.

For comparability, there are Ethereum based NFT games, scaled on Polygon, with no VC backing yet a similar number of unique active wallets/users. Are these alternatives better opportunities for traders? In the short term, probably.

Angel investing and VC funding tend to go to higher risk earlier phase companies. With this comes higher risk and higher reward. The Web2 failure rate of VC backed companies is 75%, or at least fail to return VC investors capital.

If we were to use floor price as a proxy for what the market is willing to pay for an NFT collection, then we can see that the web3 project failure rate is 99%. Jumpman performed an analysis on NFT projects, observing that only 0.58% of collections had a floor price in excess of 1 Ether.

Just because an NFT project is backed by a VC, doesn’t mean that it will be successful.

The adverse macro conditions are causing many NFT projects to suffer. Project runways are dwindling and volume is drying up meaning even the most successful project floor prices are downtrending despite positive news.

In a bull market where capital is cheap and flowing, an announcement of VC funding could pump the short term price lending it to be a viable opportunity trading the news.

Some projects with strong value propositions could be snapped up by prowling VCs at unfavorable terms as founders struggle to sustain development with lack of funding. This could lead to NFT holders receiving the raw end of the deal with the new investors maximizing their terms and returns. We’ve seen this inDefi acquisitions of failing centralized lending protocols being acquired, yet investors who have deposited their funds not receiving payouts as acquirers strip the assets and leave the debt.

• VCs are investing heavily within the web3 space. Tokenized incentives offer more liquid and profitable investment propositions to the web2 counterparts, but the sustainability of tokenized incentives is more questionable than ever.

• VC-backed projects tend to do well post announcement, so catching the news early can benefit a short term trader.

• Long-term prospects for VC-backed projects are mixed. Some sizable ventures are not performing well, and with web2 VCs experiencing a 75% failure rate, web3 is likely to be larger (less proven market with fewer paths for growth among any given project).

• We’ve already observed 99% of project floors falling below 1Ξ. Most blue chip collections have VC backing and are performing comparatively better than those that don’t.

• The increased project scrutiny and requirements means retail investors don’t have to do the same level of due diligence with the projects without VC backing. Founders tend to have to comply with KYC requirements and provide an MVP as a minimum.

• There are conflicting interests and a risk of founders losing control of their project. There could be value extraction from the ecosystem, but without the funding the project may be dead in the water and be unable to scale. A catch 2022, the lesser of two evils.

• We can use investing patterns to predict future VC targets and stay abreast of relatively established project developments. These can become prime targets.

• Some VC-backed projects are struggling to retain users, so VC funding is not always the answer. If the team is unable to execute on their roadmap, then the VC funds may not be used in the most effective manner resulting in wastage.

VC funds tend to follow the best growth opportunities - Growth industries are their bread and butter. Arguably they are smart money,but they make mistakes, evidenced by the high early failure rates in both web2/web3, and the declining user base of some VC-backed platforms. Doing your own research is always wise and can help you catch the next short-term VC announcement pump before it happens.

At OriginsNFT we leverage data-driven decision making, educational resources, and proprietary analytics to remain ahead of the curve with respect to blockchain tech and specifically NFTs. To find out more, please visit our website or Twitter.

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