The BAYC acquisition of CryptoPunks is a thorny issue. The community-based, extremely personal nature of NFT projects raise questions that are difficult to answer about the future of IP development in crypto.
“Intellectual property has the shelf life of a banana.”
— Bill Gates
BAYC Making Big Moves
On Friday, Yuga Labs, the creator of Bored Ape Yacht Club, announced the acquisition of CryptoPunks and Meebits from Larva Labs.
This is big.
CryptoPunks were the first NFT project to capture the world’s imagination and lit the fuse for the meteoric rise of NFTs these past 18 months.
Now, I will caveat what comes next by saying that I am not a part of either of these communities.
As a 100% middle of the bell curve guy, I completely missed the whole NFT trend and have watched in awe (and extreme FOMO) as these projects soared over the past year.
That being said, this acquisition raises interesting questions on two dimensions:
What M&A will look like in crypto
How to build and invest in IP in Web3
The Failure Rate of M&A is 70-90%
That statistic comes from an HBR article written in 2011. It might sound surprising that the failure rate is that high, but I feel like I kind of get it.
As a former consultant (which my employees tell me I love to mention), I have read endless frameworks for what makes successful M&A.
Will the acquisition reduce your cost structure? Does it allow you to build a new competency? Does it increase pricing power? Do you now have access to a new region or customer base?
In my experience, successful M&A hinges on answering two questions correctly:
What exactly is the asset being purchased?
Is the asset better off with a new owner?
In the case of Yuga Labs, at least part of those two questions have been answered.
Yuga Labs is buying intellectual property, and they are adding value to the IP by giving more rights to Punk and Meebit owners.
BAYC owners have famously enjoyed more rights to their assets than their punk counterparts. The idea being that if owners have more skin in the game, they will create more value around their NFTs.
At least for now, the market is telling us that this is a good idea.
The floor price for both Punks and Apes has moved up significantly on the news.
Punk volume exploded in the 24 hours after the acquisition with $18.8 million traded, a 1,219% increase over the previous day.
It’s interesting to me, however, that the BAYC floor has continued to rise whereas the Punk floor has already surrendered most of its gains.
If I had to guess why, I think it’s because the market is still digesting what exactly Yuga Labs just bought.
Specifically, the market is chewing over what makes Punks valuable and how that might change with a new owner.
To me, BAYC and Punks have very different brands. CryptoPunks felt like purist OGs, whereas Bored Apes felt more like cool, up-and-coming hustlers.
The question (and the risk in this purchase) is how do these two brands and communities merge?
Again, I’m not a part of this community, but I’ve learned a lot from the reactions of leaders like DC Investor.
You can read the entire thread here. I honestly see where he’s coming from.
One of the unique things about building intellectual property in Web3 is that it’s community based. That’s great because it gives participants upside and is a great strategy for building a loyal following.
It also means that your moat can simply decide to walk out the door, which complicates transactions like this. For instance, when Disney acquired the rights to Star Wars, there wasn’t a risk that Luke Skywalker would quit.
In the case of CryptoPunks, a HUGE factor that gave them value was respected community members (Punk 6529) or celebrities (Jay-Z) being a part of the club.
For Yuga Labs, there is a very real risk that these people will sell their Punks, and the value of the IP they purchased will be significantly impacted.
Indeed, some Punk holders have already left and others are publicly voicing their discontent.
It’s a thorny issue. The community-based, extremely personal nature of NFT projects raise questions that are difficult to answer about the future of IP development in crypto.
Building IP Is a Continuous Process
When Bill Gates famously said that intellectual property has the shelf life of a banana, he didn’t mean that it was useless.
His point was that IP needs constant reinvestment to maintain its value.
It’s not good enough to simply come up with great music, television or art. Great and enduring IP needs reinvestment.
A patent on its own is worth almost nothing. Resources need to be allocated to build the technology, it needs to be marketed, sold and improved upon.
Let’s use Disney’s acquisition of Marvel as an example. In 2009, Disney purchased Marvel Entertainment for $4 billion, which people at the time said was ridiculously expensive (ha!).
Since then, Disney has constantly reinvested in the brand. They developed Marvel Studios and Marvel Television, churning out over 20 movies that have brought in over $25 billion from box office receipts alone.
Disney has built an Avengers campus, multiple theme park rides, released countless series of toys, and generally transformed a promising but nearly bankrupt brand into a global juggernaut.
The point of this example is that simply developing IP is not enough. The battle for hearts and minds is never fully won and requires constant reinvestment to capture the next generation of believers.
Historically, this reinvestment has come from a steward like Disney, Sony, Viacom or Netflix.
The downside of this model is that eventually, the original creators may not like the steward that the IP ends up with. For instance, creators may feel very differently about their IP being purchased by Disney as opposed to a company like Meta.
If NFT projects want to avoid a centralized, corporate allocator, they will need to find a way to coordinate and allocate resources to build value for their communities.
CC0 NFT projects offer an interesting hint at what a new model could look like. CC0 is the most liberal type of creative commons license, in which the creator releases any copyright to the IP.
You can think of the combination of NFTs and CC0s as open-sourcing intellectual property. By allowing users to commercialize their assets, they will be more incentivized to evangelize and reinvest in them.
Again, it’s just a different model. In the historical model, centralized companies take on the risk of investing in the IP and therefore gain the rewards.
In the CC0 model, projects surrender upside in the hopes of attracting talented individuals who can build value in more creative, albeit less coordinated ways.
Last 2 Cents
At least for now, the Yuga Labs acquisition seems like it’s a good one.
Punk and Meebit holders will enjoy an immediate value unlock in the form of increased commercial rights for their assets, and Yuga Labs now has ownership over the two most successful NFT projects to date.
As is the case with most things, the long-term success will depend on how they execute. Even in a regular M&A transaction, melding two cultures is extremely difficult.
In the tribalistic world of crypto, striking that balance will be trickier than ever.
Ultimately, the future of how NFT projects are managed will likely be influenced by this acquisition. Will we get new Disneys managing portfolios of NFT communities, or will an open sourced CC0 model win out?
I will leave you with this. For me, this entire situation made me rethink a fundamental assumption that I didn’t even realize I was making.
Most of my mental models for thinking about investing in crypto were based around bitcoin. I assume that’s true for some of you as well.
Because bitcoin is money and derives its value from network effects and “Lindyness,” it was less susceptible to disruption.
I realized that I was extending that assumption to other types of crypto projects, when in reality, that rule does not apply.
Culture, as it turns out, is far more susceptible to disruption than money. Styles change regularly. Fashion dynasties rise and fall, and only a very select few manage to retain relevance over any period of time.
So if you are invested in, or are considering investing in NFTs, just make sure you’re doing it with the correct assumptions in mind.