On Chain Conglomerates
July 10, 2022
Crypto Mullets are the next wave of multibillion dollar web3 companies, and one way they’ll come to market is through on chain conglomerates powered by annuity-bearing NFTs.
Traditional conglomerates are, “a combination of multiple business entities operating in entirely different industries under one corporate group, usually involving a parent company and many subsidiaries” (source).
I believe this same model will come to fruition on chain to fund and create niche DAOs that generate on chain revenue streams. This model will be highly useful for music labels, movie studios and other forms of small creator collectives that can produce work that’s monetized through the blockchain.
The basic architecture of an On Chain Conglomerate will look like a Hub and Spoke model that’s interconnected through a series of ownership splits managed by NFTs:
- First comes the Hub, which mints ~1000 NFTs and sells ~1/3 to third parties while issuing another 1/3 to operators and retaining the last 1/3 for its treasury.
- Then comes the Spoke, which is created for each business entity or subsidiary. Upon Spoke formation the Hub agrees to a price per NFT which effectively sets a valuation on the original Spoke entity. Then, similar to the Hub, the Spoke mints ~1000 NFTs which are split between third party sales, DAO operators, the DAO treasury and sales to the Hub.
The bearer of these Hub and Spoke NFTs automatically receive a pro rata share of the on chain revenue that flows into their respective treasuries. NFTs for operators can be distributed on some vesting cycle to align short- and long-term incentives for all involved parties.
The main benefit of this model is that it creates a standardized protocol for spinning up on chain subsidiaries and creating annuity-bearing NFTs. There could be a single factory method that can encapsulate all of the complexity traditionally associated with creating and funding new businesses.
This model also allows the central Hub to invest upfront capital into various subsidiary business while also letting them operating independently and maintain their own business operations. Presumably, governance does not need to be tied to NFT ownership but instead can be left in the hands of the Spoke DAO operators or the existing token structure they have in place.
Additionally, the On Chain Conglomerate model would allow for new investors to continually buy into the entities on a rolling basis. New generations of NFTs could be created for the Hub and Spoke entities as a new form of fundraising while also offering pro rata rights to existing NFT holders to maintain their stake.
NFT price would be driven by the annuities they create, which would presumably increase over time and drive up secondary sales revenue in tandem.
The most obvious limitation of the On Chain Conglomerate model is it doesn’t have a clear answer for working with off chain revenues. Theoretically, a Spoke’s revenue would be passed through some “Oracle, LLC” that was wholly owned by the Hub and would then convert fiat into stable coin which would then be deposited into the respective Spoke. However, this is largely theoretical without clear precedent in the market today.
There would need to be significant thought put into the NFT pricing, both upfront and with future generations of runs to not create unjust dilution for shareholders. Since NFT ownership is directly tied to a recurring annuity, it’ll be important to properly incentivize early buyers through some means of improved economics. It’s also unclear exactly how the SEC would view these annuity NFTs as there aren’t main examples of them in the market today.
Go to Market
On Chain Conglomerates can be started in 4 steps:
- Stand up the Hub treasury and fundraise around a cohesive vision for the Conglomerate’s future business operations using revenue split bearing NFTs.
- Find the first Spoke to either buy into or to create from scratch. Presumably, someone could also start with the Spoke and then back in to the fundraising pitch for the Hub. Issue revenue bearing NFTs.
- Use business operations from first Spoke to subsidize purchase/creation of second Spoke.
- Repeat, repeat, repeat.
Are you working on or thinking about creating an on chain conglomerate? I’d love to hear from you on Twitter or Farcaster!