In Part One of this series, MGSN provided and overview of NFT. Now let’s look at how NFT’S can be used to fund a non-tech Startup. The case study involves a Concept Generation Plan created by a group of 5 nutritionist. The nutritionist met in school in San Francisco. Living in SF they were exposed to the Valley Startup culture, as many of their friends were working for Startups during the summer months
After graduation they commenced their careers in different cities but stayed in touch with each other. As the years went by the frustration that each of founders experienced, with the high failing rate the patients who were obese with related health issues, was dampening the enthusiasm for their career.
One of the Founders worked in Montreal and was able to achieve higher degree of success because she was able to work with certified wellness coachers that rounded out the gap from physician to registered dietitian nutritionists to wellness coach to success in treatment.
However, upon her return to the US, the realities of the healthcare system preclude insurance coverage, in the vast majority of the cases. Although recent changes in instances codes will help drive the success rates up, the founders felt the infrastructure is nascent and there is a huge need in the healthcare marketplace to help these patients battle lifelong issues with obesity.
As with many successful business models, a night out at a dinner was the spark for the Startup. The founders met for a reunion dinner in San Francisco, still the Startup capital of the globe, where their careers started. As the night blended into memories of their university days and the battered passion that drove them to healthcare, the conversation was soon
dominated about the complaints and frustration over the failing ratios. They discovered a common theme for the failings among their patients was snacking after the allotted meals. The snacking in between the meals was not good but had less effect on the morning weigh-ins than the late-night snacks. The need to monitor the patients’ progress in an environment that is devoid of a wellness coaching infrastructure was causing patients to give up.
One of the founders had a talent for backing nutritious versions of cookies and chips that she would generously share with her friends. As the night wore on in the city of innovative and inspiration, the founders dinner conversation transformed from despair and failings to enthusiasm and possibility.
The five Founders departed to the five different cities where they lived and worked with an agreement to keep Tuesday nights and early Saturday mornings open to develop ideas around building out a solution to this grave need in the marketplace.
The five friends thoroughly enjoyed the twice a week conference calls. As they brainstormed during these Concept Generation sessions, they expanded the menu offering to meals to create a ” catch- up day, ” if a patient had a setback on the daily caloric intake day.
They all admitted that developing this new business was more enjoyable than the daily grind. In addition to creating the menus, they moved in the direction of creating a path and place to the market.
They were able to leverage their university network to find a friend of a friend working in the San Francisco Startup ecosystem who was able to provide insight and advice on moving from Concept Generation and proposed product/service line developments into the Proof of Concept (POC) stage.
The Founders chose a prepared box meal format for three balanced meals and new nutritious snack lines that would help the patients wean off the cravings for refined carbohydrates. They conducted online research into the Trademarks/Servicemarks. They also researched Patentability for the formulas and recipes for the snacks.
Once they completed the Concept Generation and developed a product/service line they cooked and prepared an alpha product line that would be tested in the POC stage.
Under the guiding hand of the amateur cook in the group, a healthy hot breakfast was prepared and packed in designed- logo covered packing boxes. The New York based founder delivered the breakfast box to a wellness practice group located in Manhattan.
The lunch box was delivered in Chicago to a food critic with a well-known health magazine.
The dinner box was delivered to a high-powered law partner in Los Angeles who went to law school in San Francisco and complained to one of the Founders of the poor choices of healthy food options for long nights in the office.
Twenty snack bars were created. Ten were distributed in a Minneapolis University’s Nutrition program for a review. To protect the potential patentability, the review was based on the need to reveal all ingredients and disclosures, as well as the allergen protocols and food safety preparation plan. The Non -Disclosure Agreement(NDA) was drafted to protect the formulas and recipes. To save development money, one of the founders researched an NDA format online and have a friend, who was a lawyer, review it. The other ten bars were hosted by one of the founders in her health club in Miami.
The good news was the Concept Generation stage was a success. The founders generated ideas that produced product and service lines that were well received in several markets.
After the high of the success started to fade, the question that the founders needed to address: is there a business model that could be developed out of the successful concepts and alpha product development?
The success of the Concept Generation Stage triggered a desire to celebrate and collaborate, so the Founders made their way back to San Francisco. After an enjoyable celebratory dinner and relaxing Friday night, the team caught the early Saturday morning Caltrain to Palo Alto. One of the Founder’s friends from school, knew a Sand Hill Rd lawyer/engineer who had worked for several Angel and Venture Capital firms. She recently launched her new practice group in Palo Alto.
She patiently listened to the passion and market need. The Founder presented a study that identified the growth potential for the products and service lines that meet the market need.
However, they never considered the scalability issues, the POC cost, risk management strategies, pricing models, legal cost, just to name a few of the wet blankets that were thrown on the smoldering fire of presumption.
The Founders had confused the difference between the POC and the Startup stages. The POC is referred to as the red light/green light phase. The obvious reference is that the first real test of an entrepreneur’s mettle happens in the POC. This stage is the first test of the economics and scalability of offering. Can the delicious meals, which were so carefully prepared for the alpha development maintain its high quality through mass production and distribution? Can the untested marketing plan across the nutritionist professional platform provide a steady source of sales to sustain a Startup to the Growth Stage? Is there a Strategic Acquisition or PE exit strategy?
The only way to get answers to those questions is to go through the rough and tumble POC.
One of the main triggers of the red light that stops a Startup is the cost of the POC. In the case of the nutritionist, the consult in Sand Hill Rd provided an estimate of $ 50,000.00, not including patent and legal cost for the POC
Although the POC cost for this health care offering is much lower than a tech offering it was a daunting cost for the founders.
The one point that was driven home by the Sand Hill Road consult, is a point that all entrepreneurs must accept and master. The passion that drives an entrepreneur to build a company must be diverted during the development stages from POC to Exit. An entrepreneur must come to terms with the fact that a significant amount of time is going to be spent on fundraising and administration.
As much as entrepreneurs dislike fundraising, in many respects fundraising is at its root, an entrepreneurial activity. A Startup gains funds through a transaction with another entity. If the offering the Nutritionist created out of Concept Generation attracts an Angel Investment Firm, the company will gain a percentage of ownership over their project in exchange for the seed money needed to fund the POC. The closing of this funding model, after long days and nights of creating pitch decks and business plans, and the roller coaster road of presenting and rejection, is transactional and a great entrepreneurial exercise.
If the five founders decide to leverage their assets to obtain loans, they are confronted with two options. A non-recourse loan can be a good choice because if the project cannot make it out of POC, the founders will not be personally responsible to pay back the loan. Although this sounds like an attractive option, there a crucial caveat. The pool of non-recourse loans for non-tech POC offerings are slim. Assuming the Founders are able to find a lender for a non-recourse loan product, they should have a lawyer review the loan documents to identify “carve outs”, which are exceptions to the non-recourse status. If a carve out clause is invoked, the founders would be personally responsible to pay back the loan.
The traditional personal guarantee loan, will require credit checks and other eligibility requirements that will consume time for a loan application that may be declined irrespective of the promise of the offering. If the loan is procured, the founders (as borrowers) will be faced with monthly payments which will carry over as a monthly burden in the Startup. If the offering does not survive the POC, the founders will be personally responsible to pay back the loan.
A review of various Startups, articles, presentations, journals, etc., point entrepreneurs/ founders into the direction of friends and family members to fund the POC. However, the founders of the did not need to subscribe to Business Journals to receive that tidbit of information. The problem with this method is the deleterious effect a failed POC could have on those relationships. Although technically the family and friend approach is transactional, it is a blurred transaction at best. In the case of the nutritionist, they have 50,000 reasons to avoid this approach.
Another funding option is to align the project with R&D platforms that Universities have pursuant to various grants and dedicated endowment programs. This funding option is purely transactional in nature. It is laborious and comes with many conditions. The potential for patent development is an attractive offering for a university, however the founders will lose control over the Intellectual Property. Furthermore, the founders will expend a significant amount of time repositioning the offering as an educational product capable of supporting teaching models, R&D platforms, and successful studies/papers that will be used to attract talent and funds.
Crowdfunding is also transactional in nature. There are Crowdfunding platforms for seed money. A review of the varied offering in this space can project a proximation of the placement cost. The placement fees for $50,000.00 will be around three to five thousand dollars (USD) in cash and a percentage of equity (ownership).
The University and Crowdfunding option have certain potential but before the nutritionist-founders opt for these two options, they should consider utilizing NFT’S to fund the POC stage.
In the Part 1article of this MGSN series, NFT’S were presented and explained as a transactional value exchange. The goal of the MGSN two article series is to identify the stage development of building a company with a concentration on the first two stages. The POC stage is the first stage that entrepreneurs may meet the fate of failure. One of the major diving forces of failure is funding. This is the first stage which requires significant funding. It is also a challenging stage because the fear that the concept will not support a business model can be intense at moments. However, the fear of risking money at this stage and losing that money becomes a barrier to bringing good products and services to marketplace.
If the above stated options challenge an entrepreneur’s resolve because of the fear of losing money and or control, the NFT option should be explored.
The fear of losing money and control over their project presents the nutritionist with an opportunity to develop a smart NFT option.
The NFT presents a unique transactional funding scenario. In all of the other options that have been identified in this MGSN series, the founders were relying on a third -party companies (a not- for- profit in the university R&D model) to decide funding of the POC. These options are firmly in the hand of the third- party companies. The NFT model uniquely places the third-party company under the founders control.
In this case study, the founders opted to form an LLC in New York City. The LLC will be a funding company that that will mint and sell the NFTs. The Founders chose NYC because the Concept Generation examined NYC as a launch site potential. Their particular knowledge of the industry and the experience of living and working in the city provided a solid analysis of its infrastructure, size of the Healthcare systems, diverse delivery options and availability of chefs.
The other driving force behind this decision was the digital skills of the founder who practiced and lived in NYC. There are significant formation companies online that offer to form the company for reasonable prices.
The founders organized into two groups. One group would build out the NFT portfolio and the other group would develop the POC plan for the nutritious food startup. They kept the Saturday Mornings Meetings to update and collaborate. The goal of the NFT, LLC was to raise $100,000.00 in 14 months. The Tokens would be minted from the digital art that would be created by the New York Founder. The first line in the portfolio was ready to be minted. The Founder from Miami has a hobby of creating sock monkeys of famous political sports, and entertainment personalities. The New York Founder created photographs with specific background interfaces and placed the photo arrays in a set of series.
The conventional wisdom is that these digital assets might not attract significant buyers. As the basis of the transactions of digital assets is an auction format, that could be a factor. However, a digital artist based in Delhi, Amrit Pal Singh sold 57 NFTs of well-known people presented in a 3D toy faced format for $1 million USD. He completed the minting and the sale in under 12 months
The founder completed the digitalization of the sock monkeys and now was ready for minting. There are two methods to mint a token. The first means is to use a developer.
The Developers are well placed through web-based services lines and are accessible through simple search engine research. They offer minting and a suite of products and service lines, such as ensuring the proper creation of your wallet on the market. The digital wallet allows for the transactions to be facilitated with an identifiable crypto currency.
The Developer Model will help the tech-phobia owners through the lexicon that is unique to this market.
The NFT transactions utilize the term “Gas” to connote the fees to create the ownership token through the placement in a transaction market and through the buy and sales process. The security and clearance of the transaction is backed by block chain technology. The term “gassing” can mean depositing currency in the market-related wallet and /or the market transactional fee. The gas fees are similar to the volatility in a commodity market. The gas fees vacillate based on market activity. A skilled Developer or Owner will monitor the gas prices. The best site to monitor this cost is ETH Gas Station, https://ethgasstation.info/?ref=hackernoon.com
There are several markets to sell the Tokens. Developers have their favorite markets. Some markets do not charge a minting fee to upload the art for minting. Larva Labs, https://www.larvalabs.com/about has an open-source protocol. One of the projects on its market are the crypto punks. Theses digital asset based NFTs sold at the Christie’s Auction for $16.9 million USD.
Some Developers will charge minting fees for minting, even if the marketplace that the Developer utilizes does not charge for minting. They are performing the service and they will charge a fee.
The other method of Minting is OWNER generated. Although the lexicon and selling process might be overwhelming to a novice, some owners jump into the process to learn some new skill sets and control the destiny of their digital asset.
In the funding case of the nutritionist, the founders opt to go the Owner route. Although the sock monkey products line has potential, they created a test Alpha product for the initial test run in the minting and listing. The purpose of the Alpha product was to learn and make mistakes on the test product. The Alpha was digitalized pictures of the city landscapes of the 5 cities where the founders reside. They engrave the monuments in each city with the initials POC. The Empire State Building, for example, was changed in digital asset form to the EmPOC building. These series are learning models with low expectations and protect exposure of the potentially high-end digital assets, while the owners are learning the NFT process.
Once the photos are converted into Digital Assets, the owners of the assets are Nutritionist, LLC, the Founders new NFT funding company.
After conducting research into several of the NFT Markets,The Founders choose the OPENSEA MARKET, https://opensea.io/
The reason for the choice of this Market is that it offers several blockchain options. The Ethereum blockchain is user friendly. The technology attracts the largest market players in this sector. However, trades along blockchain generates fees, (gas charges).
The Founders discovered the minting process on the Opensea website relatively easy. There is also an attractive feature to hedge the gas fees, until the NFT is sold. According to Opensea “The gas price of minting an NFT on any platform ranged from $2 on a calm day to $32 on a crazy day like today”.
Lazy Minting is a cost deferral methodology. Opensea developed “collection manager [a new product development feature on the site]. This feature allows creators to make NFTs without any upfront gas cost, as the NFT isn’t transferred on-chain until the first purchase or transfer is made”.
The attractive component of “Lazy Minting” the NFT funding methodology is that the minting cost can be transferred to the closing of a sale. This option preserves POC capital. The other attractive element of exploring the NFT option to help fund a Startup is that the founders funding company can build a steady portfolio of Tokens which could help provide funding options into the Startup stage.
The citation of the successful NFT transactions is not to connote a rush to this model. The market is flooded with Tokens that do not sell. The purpose of presenting this relatively new funding model is to provide another way to keep the startup drive on track.