The Future of Startup Fundraising? NFTs? ICO? Really? Its coming back? Maybe?

11 min read

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16 hours ago

TLDR; maybe, depends on the time you reading this article.

Right now, NO WAY. NEVER. At least any new project or company that tries this way, except for Pokemon that released a card deck on Polygon can raise funds. If you were to release something now on some blockchain, super high chance you will fail, not going to candy coat it. Unless you are an OG NFT collection, building through the bear, like 0N1 Force Official Medium or Cool Cats, then perhaps your community will rally enough to make it.

In the earlier days of 2021, the NFT explosion, many in the crypto community poured vast amounts of money into seemingly abstract JPEG images — apes, punks, rocks, and the like. This was a time when the NFT hype was at its peak. However, as with many market trends, the enthusiasm has seen a decline, especially with the onset of the bear market. The current status? Not much has improved. In the last month alone, NFT sales on leading blockchains such as Ethereum, Polygon, Solana, Bitcoin, BNB, and Cardano have witnessed a decline ranging from 10% to 45%. Alongside this, the number of buyers in the NFT market has also seen a decline.

SSSoooo, today, statistically means that 95% of people holding NFT collections are currently holding onto worthless investments. I estimate that this 95% translates to over 23 million people whose investments are now devoid of value.”

Also theres that STIMGA that NFTs are scams in general. And to be honest, many of them were scams or rugs in the past 2 years. Causing many to lose money, but…

In my opinion, right now alot of hidden money is coming back out from Chnia into international Hong Kong that are from crypto, I can see many crypto tokens or NFTs that are tied to some type of RWA (Real World Assets), I can’t say for any individual projects, but there is supply there, can’t say for demand tho

The NFT market, as it stands, is grappling with a significant demand-supply imbalance. Excess supply over demand has paved the way for a buyer’s market. The inevitable outcome? Projects lacking a clear use case, compelling narrative, or genuine artistic merit are struggling to garner interest and sales.

Non-Fungible Tokens (NFTs) have emerged as a revolutionary tool, redefining the boundaries of ownership, digital art, and now, startup fundraising. Historically, startups have primarily relied on traditional means of fundraising, including venture capital, angel investors, and crowdfunding. However, the potential of NFTs as a fundraising instrument is generating significant buzz within the entrepreneurial ecosystem last year and the year before.

This article dive into the trend and exactly what happened for those who had no idea what happeend in web3 in 2021, of using NFTs for startup fundraising and unpacks the potential risks and rewards associated with this innovative approach.

At their core, NFTs are digital assets that represent ownership of a unique item or piece of content on the blockchain. Unlike cryptocurrencies such as Bitcoin or Ethereum, which are fungible and can be exchanged on a one-to-one basis, NFTs are distinct and cannot be swapped on a like-for-like basis. This uniqueness gives them a distinct value, particularly when associated with digital art, collectibles, and now, potentially, equity or stake in startups.

The concept of using NFTs for fundraising is still in its infancy, but several startups have already begun experimenting with this model. Here’s how it typically works:

1. Tokenized Equity: A startup can tokenize a portion of its equity as NFTs. These NFTs can then be sold to investors, giving them a digital stake in the company. This approach is akin to selling shares, but in a decentralized and digital format.
2. Milestone-based Fundraising: Startups can release NFTs based on milestones. As the company achieves specific goals, new NFTs can be minted and sold, ensuring that fundraising is tied to performance.
3. Exclusive Rights and Perks: Beyond just equity, NFTs can offer exclusive rights. For instance, a startup in the entertainment industry might offer NFT holders exclusive content access or experiences.
4. Liquidity and Secondary Markets: Once an investor holds an NFT representing a stake in a startup, they can potentially trade it in secondary markets, offering liquidity that’s often lacking in traditional startup investments.

Potential Rewards of NFT-based Fundraising

1. Access to a Broader Investor Base: Traditional fundraising often requires startups to tap into networks of VCs or accredited investors. With NFTs, startups can potentially reach a global audience of digital enthusiasts willing to invest.
2. Increased Liquidity: As mentioned, the possibility of secondary markets for NFTs can provide early investors with an exit strategy, even before the startup goes public or gets acquired.
3. Innovative Engagement with Stakeholders: NFTs offer a unique way for startups to engage with their investors and community. Special perks, digital art, or experiences can be bundled with NFTs, enhancing stakeholder engagement.
4. Decentralization and Autonomy: By leveraging blockchain technology and NFTs, startups can potentially sidestep traditional financial intermediaries, giving them more control over their fundraising journey.

Potential Risks of NFT-based Fundraising

1. Regulatory Uncertainty: The regulatory landscape for NFTs remains murky. Using NFTs for fundraising could attract regulatory scrutiny, especially if deemed akin to securities offerings.
2. Market Volatility: The NFT market has witnessed significant volatility. Startups might raise funds when the market is bullish, but face challenges if the market sentiment turns bearish.
3. Tech Complexity: Implementing NFT-based fundraising requires a deep understanding of blockchain technology. Not all startups might have the tech prowess or resources to navigate this terrain.
4. Potential for Scams: Like any emerging industry, the NFT space has seen its share of scams. Startups might face reputational risks if associated with fraudulent activities or if they fail to secure their NFT offerings.
5. Over-reliance on Digital Investors: While expanding to a global audience of digital investors is a perk, over-reliance on them can be risky. Digital investors might not necessarily understand a startup’s core business or be aligned with its long-term vision.

Real-world Examples

Several startups have ventured into the NFT fundraising realm. One notable example is the decentralized video streaming platform, Livepeer. They introduced a ‘Merkle Mine’ method, allowing users to generate tokens (which can be seen as a form of NFT) based on existing Ethereum holdings. Another example is Audius, a decentralized music streaming service that leveraged tokens to raise funds and incentivize content creation.

The Future Landscape

The fusion of NFTs and startup fundraising offers a tantalizing glimpse into the future of finance and entrepreneurship. While the potential rewards are significant, so are the risks. It’s crucial for startups to be well-informed, seeking legal and financial advice before embarking on this journey.

As with any innovation, the landscape will likely evolve, shaped by regulatory decisions, technological advancements, and market dynamics. Some believe that NFTs could democratize access to startup investments, while others caution that it might be a fleeting trend.

To understand the magnitude of NFTs in the startup landscape, one must look beyond just fundraising. Here’s a glance at other avenues where NFTs are making a mark:

1. Digital Art and Creativity: The most publicized use of NFTs has been in the realm of digital art. Artists, musicians, and creators have sold pieces for millions, democratizing revenue streams and offering a direct link to their audience.
2. Gaming: NFTs in gaming allow for unique in-game items, skins, and characters, potentially revolutionizing how online games operate and monetize.
3. Real Estate: There’s increasing interest in tokenizing real estate assets as NFTs, allowing fractional ownership and trade of physical properties in the digital realm.
4. Identity and Authentication: NFTs can be used to verify the authenticity of products, acting as a digital certificate of authenticity, crucial for industries like luxury goods and collectibles.

Foundation: A platform bridging the gap between digital artists and collectors, Foundation has facilitated the sale of digital artwork as NFTs, ensuring artists get a cut from future resales.

As with any disruptive technology, there are ethical and societal challenges to consider:

1. Speculation vs. Value: The NFT space has witnessed skyrocketing prices for items that some critics argue have little intrinsic value. This speculative nature could be risky for uninformed investors.
2. Cultural Implications: The monetization of digital art and assets via NFTs raises questions about the nature of art, ownership, and cultural appreciation.

Several venture capitalists, blockchain experts, and startup founders have weighed in on the NFT phenomenon.

Andreesen Horowitz, a renowned venture capital firm, has expressed optimism about the potential of NFTs, investing in several NFT-based projects. They believe that NFTs represent a new frontier in the digital economy, far beyond just art and collectibles.

Vitalik Buterin, the co-founder of Ethereum, has voiced concerns. While recognizing the potential of NFTs, he warns startups and investors about the speculative bubbles and urges them to focus on genuine utility and value.

Gary Vaynerchuk, an entrepreneur and influencer, launched his line of NFTs, emphasizing the potential for NFTs to revolutionize contracts, ticket sales, and creator monetization.

The rise of NFT-based fundraising poses interesting questions for traditional investment routes:

1. Venture Capitalists (VCs): How do VCs view the NFT space? While some VCs see NFTs as a speculative bubble, others are actively investing in NFT platforms and startups. For VCs, NFTs could represent both competition (as startups might bypass traditional fundraising) and opportunity (to invest in disruptive NFT projects).
2. Angel Investors: Traditionally, angel investors had more direct access to early-stage startups. With NFT-based fundraising, startups might opt for a broader base of micro-investors over a few significant angels.
3. IPOs and the Stock Market: If startups can achieve liquidity for their investors through NFT secondary markets, what does this mean for traditional IPOs? While it’s unlikely that NFTs will replace IPOs in the foreseeable future, they could offer an alternative route for startups to provide returns to early backers.

The NFT wave isn’t confined to any specific region. Startups worldwide are exploring NFTs, from Silicon Valley to Southeast Asia.

1. Asia’s NFT Boom: Countries like Hong Kong, South Korea, Japan, Vietnam and even Thailand have witnessed a surge in NFT interest. Platforms like Neo and Flow blockchain are exploring NFT capabilities tailored to the Asian market.
2. Africa’s Digital Artists: The African continent, with its rich artistic heritage, is experiencing a digital art renaissance powered by NFTs. Artists are using NFT platforms to reach a global audience and monetize their creations.

While the potential of NFTs in reshaping startup fundraising is undoubtedly vast, it’s crucial to shed light on the associated challenges, pitfalls, and criticisms. As with any nascent technology experiencing rapid adoption, there’s a mix of genuine innovation, speculation, and unfortunately, exploitation.

Market Speculation and Bubbles

The NFT market has seen wild price swings, with some tokens selling for millions and then experiencing sharp devaluations. Because it is kinda like a stock, the value can go up and down, many people get destroyed by buying NFTs, but it has nothing to do with the value of the startup itself.

1. Overvaluation Concerns: As with any booming market, there’s concern that hype, rather than genuine value, is driving prices. Startups looking to fundraise through NFTs might find themselves caught in volatile market dynamics.
2. Bubble Fears: Historically, rapid price appreciations followed by sharp corrections have been indicative of market bubbles. Experts who believe that the NFT space, or at least segments of it, could be in a bubble, and it already popped, many many of the NFTs value went from 100 to now almost 0.

Regulatory and Legal Hurdles

The legal landscape for NFTs, especially in the realm of fundraising, remains uncertain in many jurisdictions.

1. Securities Laws: If NFTs tied to startup equity are deemed securities, they’d fall under a slew of regulations. Startups might find themselves unintentionally on the wrong side of securities laws.
2. Consumer Protection: There are growing concerns about protecting uninformed investors who might dive into the NFT space without fully understanding the risks.
3. Tax Implications: The tax treatment of NFT transactions remains a gray area in many countries. Both startups and investors could face unforeseen tax liabilities. Some countries like Spain and USA, you have to pay heaby taxes on crypto currency in general.

Potential for Fraud and Scams

The NFT space hasn’t been immune to malicious actors looking to exploit the hype.

1. Fake Listings: There have been instances where individuals mint NFTs of artworks or digital assets they don’t own or have rights to, defrauding buyers.
2. Pump and Dump Schemes: Some groups buy NFTs en masse to drive up prices, only to sell them off, leaving late buyers with devalued tokens.
3. Project Abandonment: Startups could potentially raise funds through NFTs and then abandon their projects, given the lack of regulatory oversight.

Historically, investment opportunities, especially in early-stage startups, were reserved for the well-connected or the wealthy. NFTs, in essence, have the potential to democratize this process.

1. Global Participation: Geographic boundaries become less relevant in the NFT space. An investor from a remote part of the world can have the same access as someone in Silicon Valley.
2. Micro-Investments: NFT-based fundraising allows for smaller ticket investments, enabling a broader spectrum of people to participate in the startup ecosystem.

Beyond the technicalities, NFTs are reshaping the cultural landscapes of art and creativity.

1. Valuing Digital Art: Before NFTs, digital art struggled to find the same valuation and respect as physical art. NFTs provide a mechanism for digital artists to prove authenticity and provenance, leveling the playing field.
2. New Revenue Streams for Artists: Artists, often at the mercy of intermediaries, now have a direct channel to monetize their work, and more importantly, can earn from secondary sales through royalty features on many NFT platforms.

While NFTs promise democratization, there are concerns about inclusivity.

1. Digital Divide: The benefits of NFTs are predominantly accessible to those with the required technological infrastructure and knowledge. This raises questions about exacerbating the digital divide.
2. Market Manipulation: Whales, or individuals/entities holding significant crypto wealth, can potentially manipulate NFT markets, raising concerns about equitable access and market fairness.

The world of NFTs, especially in the context of startup fundraising, is multifaceted. On one hand, they represent a paradigm shift in how value, ownership, and authenticity are perceived in the digital age. They hold the promise of democratizing access, breaking down traditional barriers, and ushering in a new era of digital innovation. On the other hand, they come with their set of challenges, from regulatory uncertainties to socio-economic concerns.

As with any disruptive technology, the trajectory of NFTs will be shaped by a mix of market dynamics, regulatory decisions, technological advancements, and societal adaptation. The key for startups, investors, and stakeholders is to navigate this terrain with a mix of optimism, pragmatism, and informed caution. The NFT wave is more than just a trend; it’s a testament to the ever-evolving nature of the digital economy and the limitless boundaries of human innovation.

All articles and writings posted on my personal accounts solely reflect my own opinions and perspectives. They do not represent the stance of www.globalify.xyz

Hello, I’m Eric Fung, tech enthusiast & co-founder of Globalify based in San Francisco & Hong Kong. My role involves building products, and I strongly believe in delivering value to you, the reader. If you’re interested in my content, feel free to follow me on various social media platforms.