The Krause House Flightpaper

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September 3rd, 2021

Empowering fans to purchase & operate an NBA Team

Krausehouse.club September 3, 2021

Author: @GladRobot

Contributors: @thycommodore, @karsenthil, @benschecter, silkeyj#6827

INTRO

Owners, media, players, and fans each play critical roles to make the business of professional sports go and flourish. While fans are arguably the single most indispensable party to this equation, they are the lowest on the totem pole when it comes to ownership by an order of magnitude or higher. We define ownership both as equity (participation in the upside of the business) and influence (having a say in strategy).

Historically, the reason for this disparity is that there hadn’t been ways for fans to coordinate or communicate at scale. Technology has begun to disrupt this model by giving fans a common voice, first through talk radio in the 90s, online forums in 00s and more recently through social media. Fans now have more influence than ever before - but it’s still lacking. This is because without ownership, fans are seen as just a noisy consumer who has to be appeased without a real seat at the table.

Web3 changes all that by consumerizing ownership. With web3, consumers finally have the capability to collectively own and coordinate at scale. This changes the game. In this document, we will share our vision for fan ownership in professional sports, explore the various approaches available to accomplish this, outline key risks and offer our recommendation on next steps.

Vision

Our long-term vision is to empower fans of every professional franchise to collectively have real ownership of the organization. To us, this means both: 1) equity (e.g. own X% of shares), and 2) influence in governance - not just one or the other.

We understand the reader’s first instinct may be to scoff at this and say owners will never let this happen. It’s important to understand that there was a time not too long ago where players were at the same place on the totem pole where fans are today. Through the use of technology, savvy, and understanding how critical they are to the business, the ownership by players (both tangible and unrealized) has grown immensely within the last 10 years. There’s no reason fans can’t do the same if organized correctly.

Approaches:

1. Majority Decentralized Ownership (DAO)

In this model, fans would organize themselves as a Decentralized Autonomous Organization (DAO) whose ownership rights, funding, and governance would all live “on chain” (on the blockchain) and purchase the majority rights (50%+) to a franchise.

Given a majority stake, we would strive to have DAO members vote on as many parts of the team’s strategy + execution as possible.

We believe the fan community would provide the most value-add by having final say in the following areas:

  • Ownership decisions (e.g. buying or selling additional equity, allowing other investors + new valuation, etc)
  • Team Location
  • Approval of Key Executive Hires (GM/VP Ops/Head Coach/etc)
  • Marketing + Events (team uniform, player events, etc)

We do not believe the DAO will provide value-add by participating in these areas:

  • Player personnel decisions
  • Contract decisions
  • Assistant coaching/training staff

2. Minority Decentralized Ownership (DAO)

  • This model would be organized identically to #1 but the DAO would own a minority stake of the team. Given our goals on both ownership + influence, this model only makes sense if the DAO retains final say but in a more restrictive set of areas than model #1. These would include:
  • Team Location
  • Marketing + Events
  • At least partial say in key executive hiring decisions

3. Minority Decentralized Ownership (Social Tokens)

This model is where the team will create social tokens for fans to hold. These tokens will likely provide holders with benefits via digital goods (NFTs), special player + event access, and more. We anticipate that big market teams will not extend ownership or revenue sharing (see Royal for what 3LAU is doing in music), whereas small market teams may innovate more here to collect a digital + worldwide fanbase. In this model, it is unlikely fans will have any governance on team operations + strategy.

Recommendation

We believe #3 will be the end-game for every sports franchise as web3 grows. KH’s responsibility is to not settle for this, and use technology + enthusiasm to think bigger.

Our recommendation is to go with approach #2 as we anticipate the NBA will not be favorable to giving majority ownership to any faceless DAO/corporation in the near or medium term regardless of $$ offer. We believe small market teams that have been bottom dwellers and who struggle for fan enthusiasm, specifically Memphis, NOLA, Minnesota, Sacramento, and others, are ones who should be targeted.

Our approach should be to accentuate the franchise as the NBA’s first metaverse native team. It’ll be the team of the internet, NFT & memes galores, token drops, discord rooms, community managers, etc - the best that web3 + the metaverse to offer.

WHY NOW

Blockchain technology unlocks new types of ownership, specifically decentralized ownership. This technology is a prerequisite for fans to own their favorite team & we’ve finally built out enough of the infrastructure to apply this to sport ownership.

It’s not just blockchain technology that makes this timing finally here. Team ownership requires coordinating large groups of anonymous people in an efficient manner. The technology & the platforms to do this are finally here.

This is our moment.

We are entering a new age of ownership & governance. In today’s ownership economy, attention is dominated by where we put our dollars. Teams that are able to drive the largest share of attention, drive the largest shares of valuations. Teams that embrace decentralized ownership tap into a previously untapped source of new attention — and subsequently an untapped source of driving up the value of the team.

But would the NBA allow something like this?

10 years ago? Probably not — but today’s NBA is changing. Recently, the NBA has made the first step to embrace ownership by granting institutional investors the right to purchase minority equity stakes in teams. Dyal Capital, through the HomeCourt Fund, is the first of several financial offerings which serve as a vehicle for regular public investors to purchase shares in a team. In the summer of 2021, Dyal closed a 5% acquisition of the Phoenix Suns and plans on capturing additional shares in other teams. By design, financial products are driven to be operationally lean and prefer not to take on any team governance as that would be management overhead.

Krause House changes this.

Krause House’s vision is to enable fans to become owners with governance to give them a seat at the table on team decisions. By unifying the Krause House under a social token, members can be sure that the team is in fact, their team. When passion is tightly coupled with property, the league will unlock true prosperity.

Our idea is inevitable. A professional sport team will be owned by a decentralized organization in the next 10 years. We believe it will be Krause House.

Time is of the essence. The first sport and team to move into this white space will reap first mover advantages by unlocking network effects through social ownership. The compounding effects of social ownership create a path to capture the maximum value available in the market. Other teams may continue their traditional approach to governance but with each action they take some fans will be unhappy and eventually they may feel disenfranchised and leave. DAOs provide an alternative that welcomes all fan voices to be heard and elevates the best ideas to action.

DAOs

A ‘Decentralized Autonomous Organization’, better known as a DAO, self organizes to accomplish a grand mission. Members of the DAO collectively decide on what they’ll do and how to get there. In contrast to traditionally geographically concentrated groups of individuals, anyone with an internet connection can contribute to a DAO. This approach grants a huge improvement in collective resources. The Krause House will leverage blockchain coordination to transparently manage the objectives of the ownership pool, enabling collective decision making in place of a single owner (or small ownership group).

In order for an action to be made, some form of majority or reputation would need to vote in its favor. All votes would be held on an open ledger so that members can have confidence that the will of the majority is always carried forward. The DAO will benefit from Liquid Democracy vote delegation where a member can assign their votes to other members. In this case, votes are transitive so if A assigns B and B assigns C then C determines A and B’s vote. This method allows owners to delegate certain governance decisions to specialists who hold domain knowledge about a particular topic such as scouting or community relations.

GOVERNANCE

While institutional funds look to avoid team governance, a DAO excels at making governance efficient. The Krause House has the self awareness to recognize that massive collective ownership expands a team’s fanbase. In an NBA where revenue potential is dictated by geographic regions, a small market (sub 2 million residents) struggles to compete with a large market team with a population of 7 to 20 million. Imagine if ‘small market team X’ could quadruple its fanbase by offering fractions of ownership through a global DAO. While the original owner has reduced their stake in the team, the newly realized fanbase expands the market and brand value leading to the creation of a much more valuable asset. Simply stated, DAOs expand the size of the pie far beyond any dilution which occurred.

As existing ownership stands to greatly profit by working with a DAO, the value exchange must be fair. The Krause House will never act as a silent partner. As shareholders, we expect a vote in all affairs that matter from a fan’s perspective. It’d be currently infeasible to orchestrate individual roster moves but voting on a General Manager and defining principles or strategies for success is feasible. Weighing in on large decisions like extending a max contract extensions are opportunities for direct democratic input.

In a traditional organization, decisions are made in a top down fashion and occasionally a small sample set of customers are surveyed to see how the product is resonating (a slow and imperfect process). In a DAO, the customers are empowered owners that deliver the product they want. This is instant product-market fit and a primary reason why DAOs are today’s fastest growing companies. By opening up governance, a team will access a wider knowledge base and ultimately reach the best solution.

Throughout the NBA, owners are known as hyper competitive in the game of business. But making decisions can come at the cost of alienating or destroying a portion of their market. The owner who leans into decentralized governance will operate with a new found confidence that they are now always aligned with fans. The reward for this new efficient business model is unlocked when they activate a new massive global market.

TEAM REVENUE POTENTIAL

Teams activating fractional ownership stand to benefit in three ways:

  1. Market Expansion: An expanded fanbase will drive demand for existing products and services.
  2. Revenue Diversification: The new fanbase will be interested in new Web 3 product offerings like NFTs and virtual experiences.
  3. Valuation: As revenues rise and team tokens are traded, the franchise valuation should increase faster than any other team in the Association.

The following graphic illustrates the opportunity for small markets to merge with a DAO

INVESTOR ALPHA

An NBA team is a value investment with characteristics of an exceptional store of value:

Durability:

Teams have retained value over decades.

Scarcity:

The Association controls supply by preventing issuance of new teams unless it is to the benefit of all incumbents. There’s a zero percent chance that more teams are created to the detriment of league-wide valuations.

Value Retention:

Team prices have appreciated faster than inflation.

Upside Potential:

Over the past 30 years, team valuations have performed better than the Dow and are comparable to high growth tech companies.

Legacy:

As a parent looking to pass on wealth, rather than saving into a 401(k), purchasing gold or an expensive watch, one could purchase shares in a team with the intention of keeping it in the family for future generations.

Community:

Teams are cultural epicenters that you can experience collectively and form lifelong relationships around.

While NBA teams are a strong store of value, they offer an additional benefit to investors. As team prices are not correlated to any traditional investment, they are an ideal hedge against downward market forces. As cryptocurrency investments are exposed to extreme volatility, holding an asset in crypto that is as uncorrelated as possible to the market is a perfect asset to diversify one’s portfolio.

REGULATORY PATH

Krause House intends to offer various products with the ultimate goal of acquiring ownership of an NBA franchise. Some products will pass the Howey Test and others will fail. As a result, Krause House will have numerous regulatory efforts but the net result is what we desire.

Krause House will issue $KRAUSE Tokens and launch projects and/or services like NFTs to support the DAO. All capital assets will be held in treasury and uses of the fund will require a winning vote by the DAO. All financial actions here will pass the Howey test as tokens compel the DAO members into action.

Beyond the DAO, Krause House will create a second holding company where the future NBA minority stake will be housed. This entity will hold a Security Token Offering (STO) which allows for raising funds and blockchain verification of ownership. This funding model requires extensive SEC regulation oversight.

The cleanest option to acquire an NBA team stake with the intention of distributing fractional shares is to start a SPAC. SPACs are Special Purpose Acquisition Companies that are created to raise capital through an IPO to acquire shares of private companies, taking them public through a merger.

SPACs usually raise the initial funds from Sponsors who are institutional investors (SEC Regulation D filing). At this point, the stock value is based on cash-on-hand and belief in the management team. The SPAC then merges with the acquisition target and the stock price adjusts upwards with a real business to value the offering with.

Depending on negotiations with the NBA and team owners, a SPAC sponsor may not be required. A team could approve of the minority sale event and access liquidity directly from individuals. As the funding event doesn’t require institutional capital and sponsors to backstop the deal, we could offer team shares to the public without market makers or costly promoters.

Shares will be listed on over the counter (OTC) exchanges that support blockchain tokens. Team tokens will not be distributed on NYSE or NASDAQ as those platforms do not support tokens with governance rights for on-chain voting and permissions. OTCs are growing in popularity with exchanges such as Coinbase, FTX, Uniswap, Kraken and countless others.

Here’s One Path to Acquire a Minority Team Stake

  1. Register a C corp in Delaware and house the Krause House DAO inside
  2. Offer NFTs and sell $KRAUSE tokens for the treasury
  3. Form a SPAC, file an S-1 with the SEC
  4. Find an NBA asset to acquire and present it to the DAO
  5. Launch a Security Token Offering
  6. De-SPAC and merge with the acquired NBA entity
  7. List the minority team stake as it’s own company across OTC exchanges

CONCLUSION

Fan ownership & governance powered by Web 3 is the future. The financial benefits are positive for all parties but more importantly, an NBA team will benefit from the participation of the fan owner to deliver the perfect product desired by the market.

As the NBA has begun allowing traditional investment firms to purchase shares it’s important that the Association isn’t trapped under old structures. To bring the game to the globe and maximize the potential for basketball to bring the world together, there is no better partner than a DAO.

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