The Punks and The Apes

It’s been a little over two weeks since the Yuga / Larva bombshell dropped. A quick summary of what we know below:

  • Yuga Labs is purchasing the IP of CryptoPunks and Meebits along with 400+ CryptoPunks and 1,700+ Meebits
  • Contrary to many of the rumors floating around in the days beforehand, Larva Labs itself is not being acquired and will remain independent, presumably to focus on more early-stage, experimental projects and other “weird new stuff
  • Yuga Labs declined to share a ton about their future plans for the collections other than to say:
    1. They do not plan to “shoehorn” either collection into the same BAYC/MAYC model that they currently employ with their other collections (i.e., likely no plans to try to capture resale royalties in the near future)
    2. They will immediately release full commercial rights to CryptoPunks and Meebits holders, a meaningful departure from how Larva has run the collections to-date
  • The financial terms of the acquisition were not disclosed

And… that’s about it. At least as far as the official communication goes. Some of our initial takeaways:

  • At least for the moment, Yuga stands alone as the 800-pound gorilla in the NFT space.
  • The Larva press release emanates relief… and if you’ve been following these guys’ journey at all that’s not terribly shocking – they have self-admittedly not been prepared to manage a collection of this magnitude or a community with this type of fervor… finding a home for this responsibility and cashing out on their creation is a pretty natural exit ramp
  • Related – I’m not sure Larva could have hand-picked a better home for the collections’ IP. Yuga both has the wherewithal to pay for and monetize them and actually has a reputation in and understanding of the space. I can’t even begin to imagine the meltdown that would have ensued had Meta or Disney been the buyer…
  • It’s become increasingly apparent in the days since the transaction announced that this is one of many strategic moves Yuga is executing on, seemingly all at the same time. ApeCoin dropped just five days later, only one day after a pitch deck leak [1] that detailed Yuga’s ambitious 2022 roadmap. Who knows where this journey ultimately takes them, but I would say they’ve made their intentions clear
  • Probably a smart move by Yuga to nip the idea of resale royalties in the bud and simultaneously release full commercial rights to the individual NFT owners immediately upon announcement. I won’t pretend to be an NFT cultural expert, but I can imagine that there may be a bit of angst in the CryptoPunks community about the direction of the brand under new ownership. Shutting the door on what would have been an immediate value-depressant and righting a perceived long-time wrong is a decent way to start one’s tenure as de facto manager
  • This is now the second Andreessen-backed Web3 company to be on the buyside of a landmark acquisition in the last 3 months, alongside Fei / Rari – not yet a trend, just an observation

There are a lot of broader PFP/NFT ecosystem questions that arise out of this – where do the CryptoPunks fit into Yuga’s larger plan? How is this going to affect CryptoPunks and Meebits holders long-term? What are the practical implications of the individual commercial rights being fully released? Honestly, some of the best content I’ve consumed in and around these topics is probably 6529’s tweet thread and subsequent podcast with Laura Shin on the subject, highly recommend.

The questions that we want to ask today are seemingly simpler, but the answer may ultimately be a bit more complex: how much were these collections worth to Yuga? How might Larva have gone about knowing what the asking price should be? In a world with relatively unstable trading value and very little precedent to lean on, these aren’t easy questions to answer. Using what’s publicly available, we’re going to try our hand at it.

Below is an exercise that we undertook to try and estimate that value. Disclaimer: we had to make a ton of assumptions to get there, but ultimately, I think we got to a useful number. That said, the point of the exercise isn’t really the number itself in a vacuum but rather a potential framework with which to try and value the IP and potentially use in a hypothetical negotiation. This is how we might have thought about it.

The Yuga Labs Valuation Precedent

The reality is that Yuga likely has a few different potential monetization plans for the collections – third party licensing, club model opt-in, games, movies, other content, etc. Each of these options has a varying degree of likelihood to be on the actual roadmap, but the point is that they can do whatever the hell they want with this IP to try and monetize, it would likely be a bit of a fool’s errand to try and guess what they are actually planning on doing. So how might we go about estimating the value of these possibilities without knowing the plan?

One pretty relevant data point that we have to work with is Yuga’s recent $450 million fundraising round at a $4 billion valuation (I assume this number is post-money [2]). Our analysis is ultimately about the Punks and Meebits IP but it also is a bit of a hypothetical Yuga Labs valuation breakdown given how important that precedent is to finding the right answer.

Simply taking the Yuga valuation as a precedent for PFP collection value is obviously a bit problematic. Here’s why:

  1. Yuga bought actual CryptoPunks and Meebits in addition to the brand/IP from Larva which sets a baseline for how you would value the purchase (i.e., the price paid to Larva would need to be adjusted upward to account for the value of the NFTs purchased).
  2. Yuga’s BAYC and MAYC collections generate reoccurring revenue in the form of a 2.5% royalty on every secondary sale, CryptoPunks and Meebits do not [3] (when it comes to how you value a collection, this is obviously hugely meaningful).
  3. Yuga is more than just an amalgamation of its PFP collections; it is a company made up of talented and ambitious people – there is likely a meaningful amount of upside beyond what has been accomplished to-date baked into their valuation.
  4. The relative popularity of these collection groups is obviously different and thus the value of their underlying IP is different – I’m personally partial to CryptoPunks, but the mainstream appeal of BAYC is fairly undeniable at this point. (i.e., not all PFP collections are created or should be valued equally)

In short: our task is to isolate the theoretically implied value of the Yuga Labs NFT collection IP within their broader $4 billion valuation, adjust it for the relative popularity of Punks/Meebits, then adjust that implied price upward for the value of the Punks/Meebits they also purchased. Let’s get started.

The Value of the Punks and Meebits Themselves

This is the easiest value to try and estimate and effectively serves to set an absolute basement-level baseline for what Larva should have gotten paid in this transaction. In reality you should take these NFTs one at a time and value them individually, but we’re going to use a simple P x Q equation for our estimate [4].

We already know the quantity Yuga purchased of each collection, the only item up for any sort of debate here is the average price for each. My gut reaction would be to simply take the average sale price at the time prior to announce and move on with our lives. The only consideration beyond that would be the fact that this is a “block sale” of sorts and thus may have been sold at a bit of a discount given how much time it would have taken to find buyers and liquidate this basket of assets on the open market and given what that affect would have had on the marginal price of each transaction (i.e., sure, I can sell my first few CryptoPunks for an average of 70 ETH a piece but by the time I’m selling my 400th and beyond the price for those NFTs is going to likely be materially lower [5]). This would be an argument for using something closer to the floor price.

Where we landed was to use an average of the 30-day rolling average leading up to the announcement and the “Collateral Value” from our friends over at MetaStreet to approximate the right floor price. The 30-day Collateral Value is calculated using the volume-weighted average daily transacted floor price, a much better way of looking at it than simply the spot floor given the day-to-day volatility.

Ultimately, the difference between floor and average likely isn’t worth splitting hairs over. The right baseline of value to start with here is probably ~$100 million [6].

The Value of Secondary Sale Royalties

This is quite a bit trickier. The next task in determining the estimated value of the Punks/Meebits collection IP is to use the $4 billion Yuga precedent mentioned above, but only after making some adjustments to it. The most meaningful adjustment is stripping out the value of existing secondary sale cash flow.**

The subtraction part is easy, but first we need to estimate the value of those secondary sales – what do we know about them? Well, we know Yuga receives 2.5% on the total sale volume of the BAYC and MAYC [7]. We know the rough transaction and dollar volume of each collection in 2021 and 2022 via the OpenSea API and we can gross those numbers up to account for total volume by using the Nansen sale platform data. From there we can extrapolate out a few years to a “steady state” by simplistically assuming that transactions remain flat, and price continues to increase [8] but at a decreasing rate down to a steady state, of 2% [9].

One last (and pretty useful) data point we have is the 2021/22 revenue and operating profit figures from the abovementioned leaked pitch deck to use as sanity checks for our math [10]. Believe it or not (I won’t blame you if you don’t) we built these rough estimates right after the deal announced but before the pitch deck leaked. Turns out, we were basically right on the money. LFG.

Our simplistic model below for reference:

Statement of the obvious: projecting 2027 Bored Ape sales is bordering on lunacy. That being said, I definitely did crazier shit trying to value stuff when I was in banking. Estimating intrinsic value is hard and usually requires a steady state of cash flow, directional and defensible with some sanity checks is often what you’re looking for.

Now that we’ve got some seemingly decent cash flow estimates (note that we ripped the operating margins straight from the Yuga deck as a proxy, then held 2022 onward flat) we just need to value them. I used a 25% discount rate in the interim years to capture a theoretical investor’s likely required rate of return on an investment like this (I’ve seen 30-50% thrown around for crypto assets, I’m using something below the low end of that range given these collections exist, are already printing cash, and this exercise is distinct from the return expected from the company’s other operations).

Given how experimental this exercise is, I actually used both common DCF terminal value methodologies just to see what they each spit out. A 15x terminal FCF multiple for something like this didn’t feel too egregious in either direction (again, this is a multiple being applied to only this segment of cash flows when growth is steady) and the aforementioned 2% perpetuity growth rate is fairly standard. Note that I did take pretty unorthodox analytical liberty by applying a different discount rate (10%) to my terminal year for my perpetuity growth method calculation [11].

Results below:

Translation: Based on these assumptions, we would estimate between ~$1.0 billion and ~$1.2 billion of implied Yuga value outside existing secondary royalty revenue streams. That’s a lot, but it’s not insane. I mean, it’s kind of insane, but not by today’s financing standards. A ~70/30 split between proven and potential feels reasonable, even if the absolute dollar value is a bit eye-popping [12].

The Value of Future Stuff

Reminder: simply attributing this implied value to other monetization avenues for BAYC/MAYC/BAKC isn’t correct. We need to account for the fact that some of this value likely includes the potential and upside for new collections or products beyond the existing IP.

It is obviously impossible to really know how to break this down or how any of the investors thought about it… but let’s just say, for the sake of argument, that the remaining value should be split 50/50. That would effectively break the Yuga valuation into ~70% future royalty cash flow, ~15% other potential future BAYC/MAYC/BAKC-related cash flow, ~15% potential cash flow from other projects. This is almost definitively the most unknowable piece of all of our assumptions, but that breakdown doesn’t necessarily feel unreasonable.

You could certainly make an argument that future projects should capture a greater portion of this value. You could just as easily make a counterargument that the BAYC/MAYC/BAKC IP both already exists and is already wildly popular - just imagine all the shit you could do with it! Splitting down the middle and sensitizing from there probably isn’t a bad place to start.

The Value of Popularity

Almost there. The last thing we need to account for is the fact that these are two distinct collections, brands, and IP. According to the market, the basket of Yuga’s current collections is simply worth more (today at least) than the Punks/Meebits and it’s likely reasonable that that relative value delta extends to their respective IPs. Using an adjustment factor based on collection market caps at the time of announce as a proxy for overall IP worth, you can pretty easily walk the rest of the way with a bit of multiplication and then some addition lumping on value of the NFTs we estimated earlier.

Voila. A ~$450 million price tag.

Conclusion and Caveats

I could be wrong, but there’s basically no way Larva got $450 million for this IP, especially given Yuga only raised $450 million. Like I said before, valuation (especially at this stage) is often directional at best and all you’re really looking for is defensible sanity. Beyond that, this is only one piece of the broader process and negotiation. The ultimate price of an asset is almost never your estimated value of it, it’s simply what someone is willing to pay for it. I’ve seen willingness to run a process designed to entice other potential buyers to the table drive value a hell of a lot faster (and higher) than any one-on-one value negotiations ever did.

A couple final caveats to consider in the above analysis:

Caveat #1: this analysis estimates what the Punks/Meebits IP could potentially be worth to Yuga, not necessarily to Larva*.* The Larva guys are not the Yuga guys and their ability to monetize IP is simply different. There’s an argument to be made that this value represents the absolute high end of what Yuga should have been willing to pay but that everything above the value of the NFTs themselves is “synergy” and should be split down the middle. I personally don’t buy the extreme end of that argument, but you could certainly make it. For whatever it’s worth, this would imply a ~$275 million purchase price. My guess is this is a lot closer to the actual price that was ultimately paid. My guess is this is a lot closer to the actual price that was ultimately paid, and it might not have even been as high as that.

Caveat #2: There’s also the fact that Yuga may feel, to some degree, restricted in what it can and can’t do with the Punks/Meebits IP – given the distinct nature of the communities relative to their current collections. Again, I would argue against that notion given the whole community could slowly turn over based on your monetization efforts but the brand notoriety and “OG”-ness of the NFTs should mostly maintain… though it is a point that was likely discussed and an argument that could have been made.

All this is to say that our $450 million estimate definitely isn’t the “right” price… but it isn’t a meaningless number pulled out of thin air, either. Having an estimate around baseline (~$275M, give or take) and maximum (~$450M, give or take) value gives you some guardrails mentally to begin working with during the discussions. The eventual price is ultimately based on the overlap of each party’s respective willingness to buy and sell, but these guardrails and arguments like the above and how you frame them or respond during the negotiation often determine where you land within that overlap, and thus what you ultimately get paid for your work.

About the Authors

Jordan Stastny and Sam Bronstein were previously M&A advisors at Qatalyst Partners. While at Qatalyst, they advised on over $150Bn of M&A volume across some of the most significant deals in the technology industry, including the sales of Slack, LinkedIn, Mailchimp, Qualtrics, Glassdoor, and others. Jordan and Sam co-founded MSPC Partners at the beginning of 2022 to advise early-stage technology companies on M&A.

Note: Cover image via Yuga Labs on Twitter.

[1] The Yuga founders rather vigorously denied the accuracy of this deck. Regardless of what their exact roadmap is, these guys aren’t fucking around.

[2] Two reasons: A. the goal in releasing this number was probably shock value, Yuga likely just gave people the biggest number possible. B. Pitchbook says it was $4B post-money and they’ve been right enough times on non-public fundraising numbers to make me trust them implicitly at this point.

[3] These differing models are honestly a decent microcosm of the historical ethos of Larva as artists/programmers and Yuga as businessmen.

[4] Worth noting that this simplifying calculation inherently assumes that the rarity distribution amongst the collection sold to Yuga roughly maps to the distribution on the open market.

[5] See the ApeDao liquidation event as another example of this.

[6] We used a simple floor and average for Meebits given MetaStreet doesn’t lend against that collection yet.

[7] BAKC royalties go to no-kill animal shelters, Yuga doesn’t see any revenue from that collection.

[8] Predicting the direction of the average sale price of any NFT collection is basically impossible but expecting BAYC/MAYC prices to continue to rise on average doesn’t feel crazy. The average transaction price should have an inverse effect on the annual volume of transactions so I suppose things should ultimately balance out a bit even if we’re wrong about the magnitude.

[9] The rough annual rate of inflation… at least in normal times.

[10] Note that we had to back into the 2021 number by removing the estimated one-time revenue from the BAYC/MAYC releases.

[11] Not the norm but my argument would simply be that while the discount rate should be high in the interim years, no company has a perpetual cost of capital of 25%, and honestly even 10% is probably aggressively punitive in today’s market environment.

[12] Note that it’s important to use the pre-money rather than post-money valuation so as to not capture the value of the VC cash infusion Yuga just got. We should have also theoretically stripped out Yuga’s pre-financing cash balance but hard to know exactly what that might have been, and it wouldn’t have materially changed the answer.

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