Article originally featured in MVHQ's September 2022 Magazine issue. Some information may be outdated.
On September 13th, news broke that Doodles raised $54 million of equity funding from several firms including Reddit co-founder Alexis Ohanian’s firm, Seven Seven Six, Acrew Capital, FTX Ventures, and 10T Holdings. The news set the twittersphere ablaze as the Doodles social media accounts had gone silent since their last tweet on July 24th. In hindsight, the silence makes sense. You don’t want to disrupt a big investment with potential communication issues, and what better time to take a calculated gamble than in a market downtrend. The Doodles team announced that this backing would be used to facilitate onboarding new engineers, creatives, marketers, and executives to the team, growing from 11 to 30.
The new funding for Doodles and the recent rise of venture capital backed projects like Digidaigaku, has started an interesting conversation on the role of venture capital firms in the NFT space. Why do projects need to raise funds outside of the initial sale and secondary royalties? Didn’t some projects already raise millions? Yes, but things are expensive and stuff. Fundraising isn’t just about stacking paper and hiring new employees, it’s also about networking, resources, and relationships. Let’s take a look at how venture capital firms work and why it’s advantageous (or maybe not) for NFT projects to partner with them.
Dictionary.com defines venture as “an undertaking involving uncertainty as to the outcome, especially a risky or dangerous one” or “a business enterprise or speculation in which something is risked in the hope of profit; a commercial or other speculation.” Maybe we don’t need to go this deep, but it’s helpful to have an understanding that venture capital firms are all about making risky (not to say uncalculated) investments with the potential for a large return. Venture capital firms (hereafter referred to as VCs) are generally made up of a few partners who take in capital from institutions and investors looking to generate big returns on a shorter timeline (short in the real world not in web3, like 7-10 years).
The nature of the game is to make enough deals that the few big wins bring exponential returns to make up for the many failed investments. This is why most VCs are meticulous about their investments. It’s kind of like gardening. If you plant too many tomato seeds, they will fight each other for water and sunlight and your crop will be a bunch of meh tomatoes. If you don’t plant enough tomato seeds, only a few will survive and then you’ve wasted another year trying to become a gardener. But if you plant just the right amount, you have a chance to grow that state fair, blue ribbon tomato that will make your neighbors jealous and Terry from the rundown local newspaper will finally put your face on the frontpage (Terry, if you see this, you know what you did).
Once a VC has decided to make an investment, capital is given to the startup in exchange for equity in the company. The details vary deal to deal, but a win for the VC is generally one of two things. The company they invested in goes public or is sold for a lot of money. Crypto investments can look a little different. VCs might invest in a startup with a token and be given a discount on said tokens with an agreement that they are unable to be sold for a certain period of time. VCs certainly bring a cash infusion to the startup—the good ones will bring experience and resources as well.
I’m sure we have all noticed that just because a team or person can create a successful startup, it doesn’t mean they know how to grow or run one. An amazing community builder might be able to galvanize a group of people together but lack the skills or connections to create a brand with a vision. VCs bring their expertise and connections to startups they invest in. Oftentimes, they can provide the network to facilitate hiring, marketing, legal teams, and a litany of other necessary services. This is why most venture capital firms only invest in startups within their area of expertise. It wouldn’t make sense for a VC focused on restaurants to be investing in the latest DeFi project (not to say it couldn’t happen). VCs want their investments to do well and providing their unique resources in niche markets is a key part of that process.
VCs focused on web3 startups are particularly interesting. The technology and startups they invest in are brand new, and some of the firms are brand new themselves. It might be a misnomer to say that web3 VCs are brand new, as most of them are started by people deeply involved in the space or are existing VCs creating a new arm focused on web3. Fundamentally, it’s all about people. A VC is only as good as the partners who run it.
So how do we go about assessing the value of a particular VC/NFT partnership? Let’s start at the base layer, who is involved? For example, the recent $54m Doodles investmeent was led by a VC called Seven Seven Six. One of the founding partners of Seven Seven Six is Alexis Ohanian who is a co-founder of Reddit (he is also married to Serena Williams, but that’s not necessarily relevant here). The lead partner on the deal was not Ohanian though, it was Katelin Holloway. Who is that?
A quick google search will pull up some old articles and interviews where we learn that Holloway worked as an assistant at Pixar Animation, pivoted to human resources at another company, then began running the People & Culture department as an executive at Reddit before moving into the VC world. Holloway even has a website with a list of her current advisory roles for various companies and angel investments she has made over the years. She also has a podcast, nice.
Now, we take the information we’ve learned about the VC and ask another question. What is the NFT project trying to do and does the VC have experience doing that thing? Let’s continue with our Doodles example. In the Sept 13th tweet announcing their funding, Doodles states that their long term goal is “being the most important Web3 native entertainment brand in the world.” Can Holloway help them achieve this goal? Only time will tell for sure, but connections with Pixar and Reddit seem somewhat aligned with the entertainment industry. There are obviously more players here than just Holloway, but this is the type of information we need to assess the non-monetary effectiveness of the investment. It’s like a fun game of connect the dots.
Another important factor to consider is what does the VC get in return? How much equity do they get? Are there tokens involved? Board seats? In our Doodles example, the exact terms of the $54m investment are unclear. Typically, the first round of investments (or Series A) are for 20% - 50% equity in the company. So it would stand to reason that this Doodles investment fits in that range. Now where do the actual NFTs come into play? That is a great question. They don’t represent equity in the company, but they aren’t just the product either. It’s very nebulous at this point in time, but maybe it won’t be in the future, who knows. Regardless, it’s always useful to understand what everyone stands to gain or lose.
From a traditional startup perspective, partnering with the right VC to grow a company seems welcome and necessary for long term success. Experience and resources don’t grow on trees, they are cultivated over many years. The opposite would also be true, partnering with the wrong VC could bring about headaches and arguments over the direction of the company. Web3 startups may have access to more capital raising tools, like token sales, but the expertise and networking a VC can provide is irreplaceable. So next time you hear about an NFT project being backed by VCs, do a little digging and find out if it’s a good match. It’s not always about how much money can be raised. It’s about who that money comes from and the intangibles that come with it.