Building a company is challenging for many different reasons. In most cases, companies start on flash moments as ideas that come surging through one’s consciousness. Some entrepreneurs who started large firms, recount that the idea was so intense it started to consume their days. There are other entrepreneurs who get an idea, and they think about it, push it aside, go back to it, refine it and at some point, adopt it.
All business starts in the idea/concept generation stage. This stage is usually positive and energetic. It may border on giddy or manic. Just about every waking moment that is not spent working as a salaried employee is spent developing ideas. If there are partners involved, the collective excitement is the high that drives the work. This “sweat equity” is the finance piece of this stage of the company’s development.
The next development stage is the Proof-of-Concept Stage (POC). Commitment levels get tested at this stage and some of the giddiness starts to fade. This stage needs funding, beyond pure sweat equity. The funding at this stage is often called seed funds. The amount of seed money depends on the offering. If the Founders are developing a tech- based offering, the seed funds will need an attorney opinion letter on patentability and the Freedom to Operate (FTO). There is a school of thought that the high legal cost should be deferred until the tech offering survives the Proof-of-Concept stage. This strategy is based on a common practice of deferring the heavy legal and beta to prototype development cost to the Startup stage. The goal is to pass off the cost to the Venture Capital circuit.
There is risk associated with this strategy, the cost used in developing the Alpha/Beta model could be wasted if the tech offering will not survive patentability. Many tech developers will conduct patentability searches to conserve cash, but without the guidance of a patent attorney, this is a risky strategy. The other risk that is commonly accepted to provide some security during the POC stage is the use of Non -Disclosure Agreements (NDA) to protect the technology’s Intellectual Property as it is exposed to third party developers. Many times, the Founders will download these agreements from a legal document site. An NDA can be helpful but once again, it is prudent to have an attorney review the agreement to ensure that it is properly protecting the Founder’s interest.
Founders of new Tech offerings have unique opportunities to help fund the POC stage. Engineers can fund the development cost by Non-Recurring Engineering independent contracting agreements (NRE). These contracts are generated by customers of deployed technologies, and they are one-time assignments. As such it gives the founders the flexibility to fund the development during the POC stage.
NRE gigs won’t cover all POC cost, but these gigs will keep the offering on safe grounds as it moves to the Startup stage.
What if the Founder(s) Concepts are rooted in services or non-tech offerings?
Startups in the non-tech sectors face more challenging funding opportunities. On the plus side, the cost of the POC in the non-tech sectors is significantly less. In many cases the gig options are not always options. This is particularly true if the developing Startup is the side gig.
Can the Founders in these non-tech offerings use Non-Fungible Tokens (NFT) to offset the cost of the POC?
Before this option is explored, it is important to examine the NFT, as it is a relatively new transactional fintech tool in an entrepreneur’s arsenal. Although NFT’s are digital properties of value, such as crypto currency, and as a digital property it can be the utilized in transaction as the base of value exchange.
However, an NFT does not possess the fungibility of a currency- based asset. Currency issued through a central bank can be freely traded and exchanged regardless of its physical properties because each unit of the currency has an external value that is ascribed by a recognized authority. Crypto currencies are fungible based on the same principles of external values imposed on particular units of the currency.
Commodities such as The Coffee C contract are fungible based on global benchmark agreements on the price and delivery dates of green bean Arabica coffee beans.
However Real Estate value is intrinsic to a particular individual character. It is nonfungible. There is no external value standard that is imposed on its units. A small studio in Monte Carlo can be more expensive than the cost of a spacious mansion on acres of land in Mississippi.
As with the Real Estate model, the NFT is nonfungible. It is a unique non-interchangeable unit of data that is tied to a digital asset. Digital assets are representative of a transfer of hard creative assets to a digital format. The scope of digital assets has long-term growth projections that will only enhance the value of NFTs. The transfer of human development from the physical confines to the virtual space is occurring at a dizzying pace. Much of the current NFT market concentrates on digital media, photographs, and art; however, it is emails, documents, texts, blogs, podcast, and videos that also have potential to support the NFT.
As telehealth expands into complex global robotic surgery theaters, the digital capture of the surgery could be a valuable digital asset that universities, medical practices groups and even patients themselves may claim ownership of the video of the surgery as it is transferred into a digital asset. Hedge Funds with a concentration in MedTech could be market drivers in this type of digital asset. A fund could offer the patient, and the insurance company, to pay for the cost of the surgery. This could provide transactional royalties to all the participants, as a sweetener in the acquisition of the NFT, that is generated from the digitalization of the surgery video. The concentration of the digital assets in this sector will allow for the growth of a value driven portfolio of surgery -based technologies and the transfer of surgical techniques that could be resold on new secondary markets.
The point is the sky is the limit on the development potential of digital assets.
The ownership of these digital assets is similar to recording a deed of real estate ownership in the office of the county clerk’s office.
In the case of the digital asset, the means of authentication of ownership is the NFT. A sale of the NFT is secured on a digital ledger, utilizing block chain technology. The most common block chain used in NFT transactions is the Ethereum blockchain. The root of this blockchain technology is the Ethereum crypto currency. Ethereum is a popular crypto currency second only Bitcoin. The constantly developing block chain technology of Ethereum connects a global network of decentralized applications. These dapps utilize a peer-to-peer network of computers. The intuitive appeal of the dapps is the free form devoid of a central authoritarian source or a government based entity or controlled platforms in the hands of an exclusive entity.
In this system the digital applications, or programs that exist, run on a blockchain or peer-to-peer (P2P) network of computers instead of a single computer. The dapps are fastened together from private member based decentralized autonomous organizations (DAOs). In many cases, anyone can join a DAO, by simply signing up for membership.
This technical interface allows for the removal of the intermediaries of a nonfungible transaction (banks, brokers, traders etc.). The Ethereum model utilizes the smart contract feature to affect the sale of a NFT with the click of the digital button. Once the button is clicked, ownership is secured and the transaction status is irrefutable.
In the next installment of this two-part series, MGSN will discuss the minting process of an NFT and how an NFT can be used to help offset some of the Startup cost.