NFT disruption and its impact on M&A
Over the last two years, the term ‘NFT’ has become increasingly commonplace in media and technology. And despite its relatively nascent popularity, NFTs are anticipated to become a mainstay in the worlds of marketing, advertising and entertainment. This novel technology will create new business opportunities and ultimately change the way that we understand content and media ownership today.
What is an NFT?
Before we can address the question of what an NFT is, it’s important to have a basic understanding of the current cryptocurrency/blockchain ecosystem. Most people are familiar with Bitcoin, which is the largest and most popular cryptocurrency. Bitcoin is built upon blockchain technology that offers a means for creating and preserving a record of all transactions that take place involving the Bitcoin cryptocurrency. At its core, Bitcoin acts as a unit of economic exchange and store of value that can be traded between individuals on the Bitcoin blockchain network.
While Bitcoin is the most well-known cryptocurrency, there are countless others, each of which professes to offer different benefits and utility. Among these other types of cryptocurrency are blockchains that use smart contracts — the largest of which is Ethereum. Smart contracts are a critical advancement in the utility of blockchain technology. In essence, they allow for parties to agree to a contractual arrangement which is then permanently and immutably encoded into the blockchain. The contracts, which are written in computer code rather than plain English, can even self-execute when certain conditions are met. This is a critical concept to understand because NFTs are themselves smart contracts.
The acronym ‘NFT’ stands for non-fungible token. ‘Token’ refers to the fact that NFTs are digital assets exchanged on a blockchain that runs smart contracts such as Ethereum (or Solana, which is another rapidly growing smart contract-based blockchain). Historically, the word ‘token’ has been associated with cryptocurrencies themselves — such as Bitcoin, Ether (ETH) or SOL, which are the native cryptocurrencies of the Bitcoin, Ethereum and Solana blockchains, respectively — but over time that definition has evolved. NFTs are in essence smart contracts that can be bought and sold, and that entitle the token’s holder to ownership of a specific, underlying asset.
‘Non-fungible’ refers to the fact that NFTs are each unique, and not interchangeable. By way of comparison, Bitcoin is also a token, but it is fungible, because you can exchange one Bitcoin for another, and both will have the same value.
While NFTs are not digital currencies themselves, the core value proposition of these two technologies is similar. Digital currencies leverage cryptographic mechanisms to allow for verifiable, secured and decentralized economic transactions. Each transaction is immutable and permanent. NFTs have adapted this technology for the media realm, as each NFT represents digital proof of ownership of a piece of content such as art, music or video.
Consider owning a piece of media content in the same way we understand owning a piece of real estate. Anyone can say that they own a particular plot of land or building, but only one party holds the deed. This principle carries over to NFTs. Anyone can claim that they own a piece of media, but only the NFT holder will have true ownership of the asset.
Another example can be observed in the art world. There are countless prints and replicas of Van Gogh’s famous 1889 work “The Starry Night” in existence, but only one original. And, unfortunately, without having an art expert present, it can be difficult to discern the original from a replica. NFT technology has provided a means of assigning indisputable ownership rights to a piece of content, as well as a means of verifying its provenance, which has massive implications for the media space.
NFTs have typically been released as ‘projects,’ or a series of NFTs, by a wide array of groups and individuals. Most are created and stored on the Ethereum blockchain, and transacted on a website called OpenSea.io, an NFT marketplace. In order to create, or ‘mint’ as it is called in the industry, an NFT, and to subsequently buy or sell it, the user must pay a fee to the network for providing and preserving the secure environment for the transaction. These fees, referred to as ‘gas’ on the Ethereum network, have risen due to high demand and rising ETH prices, and consumers have begun to turn to other blockchains to maximize alpha on their investments. Other blockchains on which NFTs can be minted include Solana and Wax, and side chains like Polygon, which are connected to larger blockchains like Ethereum but are designed to offer unique functionality, including faster transactions and lower gas prices.
Some sales of NFTs can include full commercial rights to the digital asset, while others are sold without. But while NFTs have most frequently been used with digital art, the technology is being applied to many other far-reaching applications that will disrupt any sector that cares about authenticity, ownership rights and verification.
In summary, NFTs are digital assets that are utilizing blockchain technology to shift our understanding of ownership — and the transference of ownership — of media content, data and intellectual property.ANDREW EADDY, ASSOCIATE/NFT LEAD, OAKLINS DESILVA+PHILLIPS
Why are NFTs important?
Although NFTs can come across as esoteric, their importance has been both demonstrated and supported by some of the world’s largest brands. In August, Coca-Cola auctioned off their first-ever project on OpenSea, a ‘loot-box’ containing four NFTs, for over US$575,000. The winning bidder also received a Coca-Cola refrigerator as part of the package.
Disney is set to launch NFTs of its characters as part of a promotional campaign to drive subscribers to Disney+. A select number of new subscribers to Disney+ post-launch will receive one of these NFTs, serving as another tactic to push traffic to their platform.
Digital entrepreneur Gary Vaynerchuk launched his NFT project VeeFriends back in May, which expanded the possibilities for NFT projects. Each of the NFTs in his project have utility attached to them, a feature of the Ethereum blockchain. First, each NFT is a ticket to VeeCon, a conference that Gary is planning, for three years. Some NFTs in the project give holders the ability to play tennis or have dinner with Gary, while others offer the chance of a business mentoring session with him.
So what do all of these new projects mean? First, the injection of large-cap interest into the NFT space indicates that we are still in the exploratory phase of adoption. While the aforementioned big names entering the NFT industry does not by itself denote value, it does confirm the technology’s disruptive potential and widespread uses, which is a powerful signal for businesses.
Second, this entrance by major brands and business leaders demonstrates the technical case for NFTs; these digital assets are true game-changers for intellectual property and media. NFTs are allowing brands and creators to monetize intellectual property in ways that were not previously possible by creating a digital signature of authentication for consumers. As has been the case for centuries, provenance and a clear title is essential for asset monetization. For example, a brand like Disney has over 8,000 trademarks, patent grants and patent applications, some of which could be monetized by creating unique, exclusive NFTs.
Disney has already used their intellectual property repository to create merchandise, theme parks, licensing opportunities, television shows and movies. NFTs are an incredible, low-margin way to generate more value from existing intellectual property, and also to get more customers into the Disney universe and thus its sales funnel. Someone who purchases a Disney NFT may be more willing to sign up for the Disney+ streaming service, go to Disneyland on vacation, or purchase traditional Disney merchandise that aligns with their NFT. NFTs give brands the chance to segment their audiences in new ways, and meet and engage with their customers in their own spheres of interest. Relating with customers through NFTs can produce stronger connections, as well as more robust brand awareness and loyalty, than traditional marketing efforts.
NFTs are drastically changing the way that brands engage with their audiences. And in turn, NFT technology will stand to disrupt a number of industries, including marketing, media and even healthcare.JACK NOBLE, PARTNER, OAKLINS DESILVA+PHILLIPS
Marketing has a new face
As we know, the ecosystem of brands has increased dramatically over the past decades. This trend has led to the need for deeper engagement and stronger relationships between brands and customers. Customers need to truly experience a brand, not just buy from it.
From Airbnb renting out the house from the popular TV show “Fresh Prince of Bel-Air” to the Heineken Factory tour in Amsterdam, brands are trying to connect with consumers through new methods. NFTs present yet another way to achieve this goal, and possibly in a more sustainable, profitable and effective manner.
Let’s take a look at Louis Vuitton, the storied luxury fashion brand that recently celebrated its 200-year anniversary. To commemorate the occasion, the company launched Louis the Game, a phone app in which the user travels the world to collect 200 candles. In the game there are 30 collectable NFT items that cannot be sold and were designed by Beeple, the artist who sold the famous US$69 million NFT in March. Since then, Burberry has launched its first NFT project, with Balenciaga and Gucci exploring the space as well.
Marketing has always been an area of heavy investment for brands, with dollars going in and coming out elsewhere on the P&L. NFTs now offer a way to do marketing in a (potentially) cost-neutral way through the sale of the NFT project, creating a lasting bond between the brand and the customer beyond the point of sale. At the most basic level, most customers buy NFTs because of the potential value they can derive from the asset in the future. As a result, customers and brands are aligned in creating long-term relationships to drive value and profits.
NFTs also present users with a new brand experience, and provide brands with innovative vehicles to drive brand awareness and affinity. Brands can also use NFTs to collect customer data, test new product ideas, tell stories and generate revenue. This technology is a powerful tool for markets to build and support brands, as the success of any NFT project is predicated on its ability to create community and construct a brand. NFTs are a new conduit for brands to conduct D2C marketing. And NFTs amplify all of the strengths of D2C marketing as well: transparency, building lasting relationships, convenience and authenticity.
As a result, it’s not just brands that need to step up their understanding of the NFT marketplace — advertising and marketing services agencies have to as well. In order to fully capitalize on this new, leading-edge sales and marketing channel, many brands will need expert guidance. This presents a significant opportunity for brands’ trusted agencies and creative resources to step up and take on that expert advisor role in this burgeoning new marketplace.ANDREW EADDY, ASSOCIATE/NFT LEAD, OAKLINS DESILVA+PHILLIPS
The world of media and content is especially ripe for disruption by NFT technology. Media today is saturated with ‘middle-men’ — platforms like Netflix and Facebook that monetize through advertising or subscriptions. We have seen, through the creation of Substack and the growth of Twitch (owned by Amazon), however, that the creator economy is on the rise. Creators want to have direct access to their audiences without having to navigate and negotiate the omnipotent and oft-opaque controlling power of these platforms. NFTs offer creators a way to make content without ever having to rely on these third parties, so long as they have community buy-in.
Consider Stoner Cats. Stoner Cats is an adult animated series about five cats and their owner. It boasts an impressive voice-actor cast of Mila Kunis, Ashton Kutcher, Chris Rock, Jane Fonda, Seth MacFarlane, and even the founder of Ethereum, Vitalik Buterin. The catch? You can’t watch episodes without owning one of their ~10,000 NFTs. To boot, their website states, “We believe that content creators and fans should be able to connect and trade art directly without all the bureaucratic bullshit, to put it bluntly. With blockchain technology we believe there’s a new way for fans to engage directly with the content they want to watch and be a part of the content creation process.”
This impact isn’t limited to digital media either. The publishing industry is also facing a shake-up by NFTs. For example, if you’re an author who wants to write a book, instead of pursuing a traditional book deal from a big publishing house, you can launch an NFT project to raise funds for your book (like a publishing advance). Some of the NFTs in your project might grant your audience a signed copy of the book upon completion, while others grant them merchandise, bonus content and other valuable and collectible items that not only provide value but also help to grow your community. Platforms like Mirror have already begun to facilitate this new way of publishing books.
Healthcare is not the most obvious sector to be primed for NFT disruption, but a number of projects and concepts are surfacing that have the potential to significantly impact this industry. From manufacturing and logistics to data management, NFTs have the potential to affect meaningful changes in healthcare.
On a very basic level, NFTs can be used to hold a person’s emergency medical information to allow for greater access to data by primary care providers. This use would also allow for an easier transfer of information between providers as well, as all the information would be stored in a single asset. Taking this further, medical and procedure histories could be stored on the blockchain, creating a massive consolidation of data for the healthcare industry.
Over 1.2 billion clinical documents are produced every year, but 80% of this data is unstructured or stowed away in various Electronic Health Record systems (EHRs). The solution to this problem was often thought to be Natural Language Processing, and it still may play a role, but now NFTs have become a viable option moving forward.
NFTs are also shaking up the pharmaceutical industry in a big way through the establishment of DAOs. DAOs are decentralized autonomous organizations — organizations that operate online and abide by rules which are encoded on the blockchain. Every DAO has a different governance structure, membership criteria and business model. And this flexibility is what has allowed it to potentially threaten ‘Big Pharma.’
VitaDAO is an example of a DAO that has targeted the healthcare industry. VitaDAO has leveraged the DAO framework to create a vehicle for decentralized intellectual property (IP) and patents. The organization is funding early-stage longevity research that may not get the funding or attention it needs from larger institutions. In exchange for providing funding to researchers globally, the DAO maintains the IP, and the researchers don’t have the same strings attached as other crowdfunding platforms. If you are interested in learning more, this is a great and informative interview with members of the VitaDAO team.
Individuals can stake currency (the process of holding funds in a cryptocurrency wallet to support the operations of a blockchain network or organization) to join VitaDAO, and offer a range of services such as providing capital, IP assets, labor or data. Through a combination of these services, members support and finance the development of new therapeutics. This is IP and patent creation. Those assets are licensed to third parties to generate funds that are used by the DAO. Research data is also licensed for revenue. With these funds, VitaDAO intends to fund more research, and also buy valuable healthcare IP to hold and license, bringing more value back to the organization. In this model, value is distributed to the creators and researchers of drugs in a more equitable way, and not just the final manufacturer, publisher or seller.
And the infrastructure is already in place for future growth. Ocean Market is a marketplace for people to buy, sell, trade and publish data sets that have been tokenized and can be purchased with cryptocurrency. Molecule connects academic researchers with biopharma investors by tokenizing early-stage IP assets and allowing investors to buy portions of new drug IP. NFT technology has created an opportunity for decentralized healthcare, where ‘Big Pharma’ doesn’t have complete control over the medical research and drug creation processes. The entire healthcare industry should be focusing on the development of these projects as they will likely have an impact on the future of personalized medicine and healthcare. These DAOs may also become highly attractive M&A targets in the future.
One of the largest industry impacts that NFTs are primed to have in the near future revolves around NFT infrastructure and service companies. These companies will exist primarily in the technology sector, but will affect e-commerce businesses, agency businesses and many more.
One example of this type of player is Bitski. Bitski has voiced its desire to become the ‘Shopify for NFTs.’ Based in San Francisco, Bitski raised US$19 million in a Series A led by Andreessen Horowitz. Other investors include Kindred Ventures, Galaxy Digital and high-profile personalities like Jay-Z, MrBeast and 3LAU.
Bitski aims to provide creators with storefronts on their platform to sell NFTs, offering an alternative to the biggest marketplaces like OpenSea.io, which raised US$100 million at a US$1.5 billion valuation from A16z last July. The company will also offer NFT purchases with credit cards, and ‘forgot your password’ features that do not typically exist with cryptocurrency wallets today.
CEO Donnie Dinch has drawn comparisons between Bitski and the iPhone, noting how iPhones come preset with a few applications, but are ultimately a proverbial ‘mall’ within which app developers can create ‘stores.’ He hopes that Bitski follows a similar path, providing tools for creators to set up storefronts, and then leveraging third-party developers and creators to populate their mall.
The sports industry is also seeing a lot of NFT engagement, with Dapper Labs, the company behind NBA TopShot, and Sorare, the soccer NFT business, raising over US$900 million in September 2021. Dapper Labs received a US$7.6 billion valuation, and Sorare a US$4.3 billion valuation, post-money. Rare collectibles and data analytics have been part of the sports market for decades, and NFTs present a perfect digital parallel for tapping into an already ripe community of sports enthusiasts.
Finally, NFT gaming has seen immense interest from retail customers in recent months. Gaming as a sector has witnessed rapid growth since the beginning of the COVID-19 pandemic, and the advent of NFT technology has added a new layer of value and experience to this space. Andrew Wilson, the CEO of Electronic Arts (EA), the second largest gaming company in the Americas and Europe, has stated that NFTs are “the future of our industry.” He has backed up these claims by posting job listings for EA related to NFTs and blockchain development. Ubisoft and other EA competitors have also begun to embrace this new chapter in gaming, while, in contrast, the gaming platform Steam has actually banned them.
High valuations have appeared in this sector as well, with Mythical Games raising US$150 million at a US$1.25 billion valuation in November. This round was led by Andreessen Horowitz, and follows a US$75 million raise in August. The company’s goals are ambitious; boasting over 100 employees and notable backers, Mythical hopes to create a NFT gaming platform on which developers can build.
Impact on the M&A Landscape
Given that the NFT industry is still in its infancy, there is not a wealth of data points to leverage when considering its impact on M&A. That being said, there are trends that we can observe from the last four years of NFT disruption that will give us useful clues regarding how NFT M&A will behave in the coming years.
NFT deal count by quarter 2017–2021
As you can see, 2021 was a big year for NFT M&A. From 2017 to 2020, there were 79 recorded transactions. In 2021, there were 222. That is a 64% increase in deal volume compared to the previous three years. This might have been partly catalyzed by the rise in M&A across the board coming out of the COVID-19 pandemic, but it cannot be denied that there is heavy interest in this industry. It’s also worth noting that over the past four years, deal volume in the NFT space has increased YoY, yielding a 100%+ CAGR during that period.
The NFT verticals being invested in also tell an interesting story. Agnostic blockchain and NFT technologies have seen the largest investments over the last four years, with fintech and gaming being the best next-largest sectors for investment. Anecdotally, the gaming sector has been the subject of many new projects being released, with recent talk of the metaverse making the gaming application for NFTs more attractive. From Facebook rebranding to Meta to Microsoft introducing 3D avatars, the interactive and communal applications of these technologies seem to be capturing people’s attention. And games on the blockchain also offer passive income opportunities through in-game mechanics that have the potential to generate significant returns. We expect NFT gaming to continue growing, along with areas like healthtech that have not truly been explored yet. There is a real sense that people are seeking to get into the space early and build value, with a lot of white space to do deals.
Number of NFT investments by verticals 2017–2021
Finally, let’s look at deal types. Unsurprisingly, most of the deals in the NFT space to date have been Seed-stage and Early-stage. Oaklins DeSilva+Phillips had representation at the NFT.NYC conference last November and, from speaking with business owners in the space, discovered that many launched in 2020 and 2021.
Number of NFT investments by deal type 2017–2021
Not only was the transaction large in dollar terms but it also provides insight into what can be acquired in an M&A process between NFT projects. In its announcement, Yuga Labs shared that “we now own the brands, copyright in the art, and other IP rights for both collections, along with 423 CryptoPunks and 1711 Meebits.” And notably, Yuga Labs is providing full commercial rights of the NFTs to the individual holders as part of this merger, and while it will not be transferring the full copyright, this is a step that former owners Larva Labs never took, but one that was requested ad nauseam from members.
In terms of next steps and what this deal means, the company shared that it “will soon be granting CryptoPunks and Meebits holders the same commercial rights that BAYC and MAYC owners enjoy. We’re working with our legal teams to draft the new terms and conditions for both collections, and expect to share these with the community soon.”
This deal is arguably the biggest that could have happened in the NFT space in terms of cultural importance, deal size and radius of impact. This will likely be the reference point that many other projects look to as they consider how they can leverage their sales profits and DAO holdings to create more value for their members.
The early days of NFTs were about launching projects, and now there are a plethora of companies sprouting up to provide infrastructure for the NFT space: NFT agencies, service companies, and data and analytics companies. More will continue to appear as the space stabilizes and uses for this technology expand. As such, it is important to have a perspective now so that you can be opportunistic in the ways you want to interact with NFTs. This means company leadership making a concerted effort to understand both the industry and which companies will provide the most important information, services and value.
Oaklins DeSilva+Phillips is a leader in mid-market M&A, and specializes in the sectors where NFTs will have the greatest impact: media, technology, marketing, healthcare and education. If you are curious about how NFTs will affect your business, or are interested in potential M&A opportunities in the space, please contact us. We would be happy to have a consultation to understand your company and where it fits in this ecosystem, and to strategize an approach that will allow you to be at the forefront of this revolutionary and disruptive new technology.