In our first report: Uncovering the global NFT market, we highlighted the exponential growth experienced by the NFT ecosystem in 2021. The global funding amount has skyrocketed from US$37 million to US$4.8 billion in 12 months – recording YoY growth of 12878%. In this article, we deep dive into NFT investment trends to comprehend the growth prospect of the ecosystem.
First, who are the investors behind the deals? And why are they important?
The investors encompass venture capitalists (“VCs”), corporate venture capitalists (“CVCs”), corporates, angel investors, private equity (“PE”) firms, etc. VCs are leading the deal share among other investors. VC is a private equity investor that provides capital to companies, usually startups, with high growth potential in exchange for an equity stake.
VC funds are an essential catalyst for incubating business innovation and emerging technologies. In addition, the VC investment activity is an early indicator of disruption to the industry players – it could be a new industry or business model that potentially translates into high economic growth.
Back to the big picture: Blockchain VC State
Based on CB Insights, global blockchain funding has risen from US$3.1 billion to US$25.2 billion in 2021. After five years of slow-paced growth, this gets much whiplash — watching the blockchain funding surge by 713%. Before 2021, startups with unicorn status were a rare breed in the blockchain, primarily because of the lack of viable market adoption. However, things have changed. We’ve witnessed an addition of 40 new unicorns in 2021- showing more blockchain startups looked up as high-potential benchmark companies.
Behind the overnight blockchain boom, there is no doubt that cryptocurrency is the critical enabler of the extraordinary startup landscape. The top sectors that gain most traction are exchange & brokerages, custody & wallet, NFTs and DeFi. And NFT-related startups have outperformed, securing 259 out of 1247 total blockchain investment deals. From the same CB Insights report, it was noteworthy that the growing interest in NFTs is not limited to the US only. Still, a similar trend was also observed in Asia, Europe and even the LatAm region – indicating NFTs took the global investor by storm in 2021.
Why do VCs rush into NFT startups?
What key factors drive global investors to pour cold cash into NFTs related startups? Why are the investors confident that NFT is an opportunity instead of a hype or an impending bubble? Next, we will lay out the thesis and hypothesis behind the investment decision by the VCs.
1. Ride on the “decentralisation” bandwagon
Decentralisation internet or Web 3.0 is a hot topic in the tech world. Many believe that Web 3.0 will be the next internet revolution, where applications will be built on trust-less blockchain infrastructure, enabling decentralised protocols. Furthermore, instead of tech giants monopolising the internet, the protocols are governed and operated by the community (internet creators and users) in Web 3.0. And the entire ecosystem runs on tokens.
Meanwhile, the core concept of NFTs is tokenised digital assets, where each NFT is unique and non-interchangeable. Digital scarcity allows NFTs holders or creators to exchange their tokenised assets, be it artwork, data, or even gaming avatar skins on NFT marketplaces. This simply means that users will have full, authenticated ownership of their digital footprints and are not under the control of centralised third-party platforms or databases. With that said, blockchain technology, particularly NFTs, are a vital element to a user-first future, which explains why VCs are going wild with NFT-related startups.
2. A disruptive business model for mass appeal
NFT capabilities are creating new revenue avenues for everyone, from global brands like Nike to the local artist in your neighbourhood. Depending on the project owner’s motivation, they can decide what their NFTs represent and how the economic model works.
Here’s one simple example. Instead of selling via an e-commerce platform like Etsy, an artist can sell their artwork directly to the buyer with stipulations in smart contracts. Such smart contracts could be pushing a percentage of resale proceeds of the artwork back to the original creator, bringing long-term value to the artist.
There could also be an NFT representing membership that gives future benefits to the NFT holder. For instance, NFT holders get voting rights to decide who Nike should collaborate with for the next pair of limited-edition sneakers. Rather than ad-driven sales, it helps the brand to understand their customer better and produce something that fits market expectations. The community model creates a spillover effect to brand sales.
There are many other business models that NFTs can enable. The flexibility of giving project owners the right to determine how they want to run the project and generate profit will undoubtedly invite more individuals and enterprises to participate in the NFT ecosystem.
3. A massive influx of talent into the industry
“We are unquestionably seeing some of the best and brightest of Silicon Valley, or tech, move over to crypto. I’ve been at this a long time, I’ve never seen a change happen this quickly,”
Scott Fletcher, a recruiter from Intersection Growth Partners**
A business will only be successful with the right person running it. Likewise, attracting the right talent pool will accelerate decentralisation technology growth. Many mainstream media have reported top talent and executives are moving from big tech firms, even Wall Street, to participate in the blockchain space. It is evident; people see blockchain as a promising career path that will shape the future economy.
This could be one interesting angle for investors to examine the industry’s prospects. The momentum of skilled individuals shifting into the blockchain industry is a solid booster to quickly establish the NFTs’ ecosystem.
4. Tap on the investment opportunity before it gets too expensive
Data shows that 89% of the NFTs deal are early-stage funding, and these are usually startups that already have a viable product and are entering the development phase. Despite higher risks, investors who invest at an early stage are likely to have better negotiation terms on equity as the startup’s valuation is lower.
On the other hand, as NFTs are getting more popular, we start to see high-profile VCs like SoftBank, Andreessen Horowitz, Sequoia Capital scouting high-potential NFT companies. These renowned VCs are famous for writing huge paycheques to bet on startups and send startup valuation soaring. On the flip side, this could mean it is more expensive for investors to get into the space later.
In short, we believe most investors do not want to lose out on the golden opportunity to elevate their portfolio returns via NFTs-related investment, especially when the NFTs market is relatively new.
Analyst’s comment
The VC landscape is getting intense. Other than the VCs we mentioned above, there are many other VCs and CVCs such as Moonrock Capital, Cinchblock, Pentera Capital, Coinbase Ventures, Binance Labs, Aminoca etc. These particular VCs and CVCs focus on blockchain-related startups or businesses that will shape the Web 3.0 ecosystem. And these investors have a competitive advantage in securing good investment deals, as they are familiar with the space and have a clear vision of how the new investments can complement their existing blockchain ecosystem.
It goes without saying that the funding scene in NFTs or the blockchain landscape will continue to thrive in 2022. With investors and firms shovelling cash into NFTs startups, we are excited to see their voyages to the future.