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Should we be prepared for the worst?

Last month, I went really deep into dot com bubble research and outlined 17 companies that spectacularly failed after hitting enormous valuations. In 1999 alone there were 457 Initial Public Offerings (more than 1 per day!) and it reminds me of the current NFT market state.

The reality is that when people are making money, others want to join in. If demand continues to keep pace with supply, this behavior will continue.

There are many legitimate high-dollar sales that keep people coming back to the NFT market, but what happens when demand just cannot keep up with the supply of new projects?

When a project like Pixelmon can sell out $70 million for a half-baked project that they now need to pay someone else to actually build, it will keep attracting people who want to make money and capitalize on the euphoria.

We have to get better at evaluating projects and try to build more discipline to avoid FOMO (fear of missing out). I don’t want any of you to get rekt.

Lessons from the dot com bubble can help us do just that.

What struck me the most is that a lot of companies that failed during this era had really good ideas.

Pets.com attempted to sell pet supplies online (Chewy.com which does the same thing is currently worth $13 billion).

But the problem was infrastructure:

“in 2000….there were no plug-and-play solutions for eCommerce/warehouse management and customer service that could scale . . . we had to employ 40+ engineers. Cloud computing did not exist, which means that we had to have a server farm and several IT people to ensure that the site did not go down. There were less than 250 Million worldwide Internet consumers in 2000- now there are 5 Billion.” — Julie Wainwright 

There was even a grocery delivery service in 8 cities that raised $375 million at a $1.2 billion valuation but the stock price dropped to $0.06 per share.

The common theme of failed dot com bubble companies was that their ideas, goals, and management styles exceeded the current infrastructure available to them.

There was so much “win-now or lose it forever” pressure that marketing budgets were inflated to capture market-share without any real way to track customer acquisition costs.

Nowadays, bulletproof attribution is just a few clicks away.

Cloud computing now exists, replacing the need for expensive server farms and IT teams to keep an e-commerce website live. Shoot, you can now launch and manage an e-commerce store through companies like Shopify with very little cost. It’s a different world than it was 20+ years ago.

The reality is that these companies were too early for what they were trying to do and even the good ideas failed in execution.

Can a good founder outmanage poor infrastructure? Jeff Bezos seemed to navigate it well with Amazon, but it is very clear that it is a rare trait as more companies during the dot com era failed than succeeded.

The Problem and Misunderstandings of NFT Infrastructure

(1) Over-Crediting Project Founders

Over the summer, every new project that launched was a fun “what if” or “imagine if”.

I remember reading in the Alpha Betty Doodles Discord things like “imagine if this becomes the next Hello Kitty.”

And then I read the sentence that caused me to sell my Alpha Betty Doodles for a slight loss: “I’ll hold one of these, and buy my yacht with the other.” That person was serious.

The project is now at a .03 ETH floor —I actually bought two recently, but only to test a product that I’m building that sends text messages when someone purchases an NFT.

Many “analysts” at the time cited Alpha Betty Doodles as this first children’s NFT and that whales would want to buy them for their children.

Some mentioned that the project founder had a book out, which was way more than other NFT project founders had on their resumes at the time.

The problem?

The book had 3 Amazon reviews. It was launched a few weeks prior to the project drop. It wasn’t like this was an established, famous author who had an existing brand and was turning it into an NFT.

This is not a knock against Alpha Betty Doodles - they’ve made some great donations and put an emphasis on childhood education, but we are over-crediting the ability of project founders to compete with iconic brands like Hello Kitty.

I even went to lengths to track down the top 50 failed famous animated TV series to learn from that as well.

There was some heavy-hitting IP, celebrities, and strong production companies behind them, but they still couldn’t last for a variety of reasons. It all came down to one thing: the available demand funneled into 3 animated TV shows with lasting presence (South Park, The Simpsons, and Family Guy).

There will be NFT projects that rival the best brands, and they will do phenomenally well financially, but we are talking 1 out of 1,000 or even 1 out of 10,000 at the rate new projects launch these days.

(2) NFTs are NOT Shares in a Business - They Are Not Securities, and If they Try To Be Them, It Could Kill a Project

Do not get me wrong. I love NFTs. There are plenty of ways to offer utility and value through their existing infrastructure, but I think a lot of people are buying NFTs thinking they have a share in something.

That infrastructure isn’t ready yet. Bored Ape Yacht Club could snag a $5 billion deal and have no clean legal way to pay out its holders.

That’s not to say holders can’t license their own assets (and many have been doing this) but if you are buying a project thinking you own a share of the business model, you are not correct.

You can read more about the liabilities of issuing securities without federal and state security law compliance here. The short of it is that if a project issues an NFT that behaves like security and promises future earnings directly tied to activities of the project itself and doesn’t comply with these regulations, they could be subject to significant fines.

Maybe we are intellectually aware of that, but I don’t think many people have thought this through in practice. Too many people throw a high-level idea into Twitter “Bored Ape Yacht Club will issue a token. Imagine millions get the chance to fractionally own a piece of Bored Ape. Prices go moon.”

What will make the token valuable? Will there be a market for it? Are there incentives to hold long-term? What are those incentives?

Yes, there will likely be a bump in the value of the token, but primarily short-term until there’s a clearly defined and attractive value proposition of holding it.

We are early in the NFT space and I bet the security aspect gets figured out in the next 5-10 years, but for now, it’s tricky waters that may confuse some people spending large amounts of $ on projects thinking they tie to direct financial payouts.

There’s also not a lot of infrastructure for licensing.

I predict that there will be agencies and services that help you find brand partners and licensing deals for your NFT assets, but right now only big names like Guy Oseary are taking this on. Like the Shopify for NFT licensing.

History repeats itself. As the internet matured, people built companies to make it easier to do so many things. The cloud, WordPress, Stripe, no-code tools, Fiverr.

There will be companies that connect brands with digital NFT influencers. Slapping your Bored Ape on a cereal box in exchange for a fee may just be the thing that differentiates it on the grocery store shelves. You can do this today, but you largely have to navigate this yourself.

Savvy creators will leverage their NFTs to build followings, include them in their content and find ways to get the deals done, but it’s not mainstream.

Closing Thoughts

Everyone is now saying you need to bet on people, the jockey, the creators of projects, but I don’t think it is fully understood how rare those people are.

We will watch infrastructure unfold over the next few years and good project operators need to know how to take advantage of them or adapt to changes.

On the flip side, some projects will hold value for non-roadmap reasons. Culture is still strikingly powerful and being part of a club that can flex on the internet (with a reach of millions) versus a fancy car in your neighborhood.

mfers has no roadmap and no promises. Its floor price is 3.65 ETH.

The fact that it doesn’t have a roadmap actually makes it attractive. It is what it is - no need to worry about securities, promises, etc. Memeability has value even if it’s not intrinsic or something we don’t understand.

It will be exciting to see infrastructure form around the popularity of NFTs and watch our world change because of it.

The simplest advice I can give right now is not to spend money you can’t afford to lose. Timing matters, but I don’t believe that it is now or never to get in early in the space.